Topic AInternational Taxation, Cross-Border Capital and Anti-Avoidance Law
Central Government Notifies Principal Purpose Test in India–Mauritius Tax Treaty to Curb Treaty Abuse
The Central Government formally notified amendments to the bilateral Double Taxation Avoidance Agreement (DTAA) between India and Mauritius under Section 159(1) of the Income-tax Act, incorporating the landmark Principal Purpose Test (PPT) to combat tax evasion and treaty shopping.
Key Facts & Dimensions
- Principal Purpose Test (PPT) Standard: Empowers tax administrations to deny treaty-conferred benefits (such as reduced withholding tax on dividends, interest, or capital gains) if obtaining that tax advantage was one of the principal purposes of any transaction or corporate arrangement, unless granting relief aligns with the underlying object and purpose of the treaty.
- OECD/G20 BEPS Alignment: Operationalizes minimum standards under Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances) of the Base Erosion and Profit Shifting (BEPS) framework.
- Grandfathering of Past Investments: Safeguards historical foreign direct investment (FDI) inflows by exempting investments made prior to 1 April 2017 from the scope of the PPT, providing certainty to long-term institutional investors while subjecting newly structured conduit entities to rigorous commercial substance scrutiny.
Exam Takeaway & GS Relevance
UPSC GS-III (Indian Economy, Taxation, Base Erosion & Profit Shifting - BEPS, DTAA, Capital Markets).