NEW DELHI: In a major relief for foreign investors in India from Mauritius, Singapore and Cyprus, the Central Board of Direct Taxes (CBDT) has clarified that investments from these countries made prior to April 1, 2017 would be eligible for benign or zero capital gains tax, irrespective of whether the investors’ sole purpose was tax avoidance.
In a fresh guidance note issued on January 21, the tax board said the anti-avoidance measure “Principal Purpose Test (PPT)” agreed to in March last year under a bilateral protocol, would be grandfathered in respect of Mauritius, Singapore and Cyrpus.
The PPT is a provision included in tax treaties between countries that have signed and ratified the ‘Multilateral Instrument’ (MLI), an action plan introduced by the Organisation for Economic Cooperation and Development to address tax avoidance in cross-border arrangements. So, PPT seeks to deny the tax treaty benefits in cases where any of the principal purposes of the concerned arrangement was to obtain such tax benefit.
However, the CBDT has now clarified that the grandfathering provisions under the India-Cyprus DTAA, India-Mauritius DTAA and India-Singapore DTAA would remain outside the purview of the newly issued PPT provision.
A 2016 amendment to the DTAA, it may be recalled, had ended the virtual zero capital gains tax benefit for Mauritius investors, by making gains from sale of shares purchased after April 1, 2017 taxable at India’s rates, with a transitional phase.
The DTAA, which allowed the lower of the tax rates among the signatory countries to prevail, meant nil tax capital tax liability for investors, as the African nation kept the rate zero.
The protocol is in compliance with the OECD-anchored plan to reinforce anti-abuse provisions, under the so-called base erosion and profit sharing (BEPS) framework. The India-Mauritius tax treaty would now acquire the status of a “covered tax agreement under the BEPS Multilateral Instrument. Essentially, a principal-purpose test (PPT) would be prerequisite for the tax benefits to be granted, in cases of investments made from April 1, 2017 onwards.
The PPT is aimed to enure that tax reliefs will be denied if “it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that treaty benefit is one of the principal purposes of the party seeking to rely on the relevant double tax treaty.”
Mauritius is the first country with which India has amended its DTAA’s ‘preamble’ to avoid creating opportunities for “non-taxation” or “reduced taxation” through means of tax evasion or avoidance for taxpayers. The PPT rule will take effect only when it is notified by the respective governments.
“The government’s efforts of clearly and unambiguously stating its position on some of the key aspects relating to the invocation and application of PPT is welcome,” said Vishwas Panjiar, Partner, Nangia Andersen LLP. The guidelines also recognise and in fact, nudges tax authorities to refer to BEPS Action Plan 6 as well as UN Model Tax Convention (subject to India’s reservation on specific matters) for supplementary sources of guidance while deciding on the invocation and application of PPT provisions. “Any guidelines or clarification or even FAQs issued by the CBDT in the form of a Circular are required to be mandatorily followed by the tax officer but carry only persuasive value for a taxpayer as well as Courts. Therefore, the guidelines should serve as a baseline interpretation for the taxpayers as well,” Panjiar said.
Source: The Financial Express