India Clarifies Tax Treaties with Mauritius, Cyprus, and Singapore

The Central Board of Direct Taxes (CBDT) in India has clarified that investments made under tax treaties with Mauritius, Cyprus, and Singapore will not be subject to retrospective scrutiny under the Principal Purpose Test (PPT). This move addresses long-standing concerns about global tax regulation scrutiny and provides stability to investors.

On January 22, 2024, India’s Central Board of Direct Taxes (CBDT) issued a circular announcing that investments originating from Mauritius, Cyprus, and Singapore before April 1, 2017, would continue to benefit from favorable or zero capital gains tax rates, even if the primary objective of such investments was to leverage tax advantages. This clarification ensures that these investments are exempt from retrospective application of the Principal Purpose Test (PPT), a mechanism introduced as part of the Base Erosion and Profit Shifting (BEPS) framework to prevent treaty abuse.

The PPT aims to deny tax treaty benefits if the arrangement’s primary purpose is tax avoidance, ensuring that such treaties are used for genuine commercial purposes rather than as tools for tax evasion.

Addressing concerns around the India-Mauritius treaty protocol

The CBDT clarified that the PPT provision under Double Taxation Avoidance Agreements (DTAAs) would be applied only prospectively. It emphasized the need for an objective evaluation of facts and circumstances when applying the PPT, thereby fostering consistency and fairness in its implementation.

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Moreover, the CBDT reaffirmed India’s commitment to treaty-specific bilateral agreements with Mauritius, Cyprus, and Singapore, which include “grandfathering” provisions. These provisions protect investments made before a specified date, ensuring they remain unaffected by the PPT. As a result, pre-existing investments under these treaties will not lose their tax benefits, providing much-needed stability to investors.

Tax experts have welcomed this clarification as a vital step in upholding treaty-specific commitments and alleviating uncertainty. Industry observers note that this announcement resolves lingering doubts regarding the India-Mauritius treaty protocol, paving the way for its formal notification and implementation in the financial year beginning April 1, 2025 (FY2025-26).

Judicial support for treaty stability

The clarification from the CBDT aligns with a recent tribunal ruling involving Luxembourg-based SC Lowy P.I. (LUX) S.A.R.L., which marked the first judicial examination of the PPT in India. In this case, Indian tax authorities sought to deny treaty benefits, citing a lack of economic substance and beneficial ownership. The Income Tax Appellate Tribunal (ITAT) ruled in favor of the taxpayer, asserting that treaty benefits cannot be denied without concrete evidence.

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This judicial precedent ensures that the PPT is not applied retroactively and that grandfathering provisions under treaties with Singapore, Cyprus, and Mauritius remain valid. These measures are expected to enhance investor confidence by ensuring predictability and stability in India’s tax treaty framework.

Understanding the grandfather clause

The grandfather clause serves as a crucial transitional mechanism in tax treaties and legislation. It preserves the applicability of existing laws or treaty benefits for a defined period when regulatory changes occur, offering stakeholders a buffer to adjust to the new framework.

In the context of India’s tax treaties, grandfather provisions protect investor interests by ensuring continuity and mitigating disruptions that could adversely affect the financial stability of businesses.

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