Government issues guidance on application of ‘principal purpose test’ under tax treaties

In a welcome development, the Central Board of Direct Taxes (CBDT), India’s apex tax administration body, has provided much-needed clarity regarding the application of the ‘Principal Purpose Test’ (PPT) under tax treaties. The CBDT has clarified that in case of shares acquired by residents of Mauritius, Cyprus, and Singapore in Indian companies prior to 1 April 2017, the gains on transfer of such shares will remain outside the purview of the PPT and that the PPT will apply prospectively. This guidance alleviates concerns about the application of the PPT, thereby reducing uncertainties and potential tax disputes. Please find attached our Ergo on the ruling.