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The Central Board of Direct Taxes (CBDT) has issued new guidelines for applying the Principal Purpose Test (PPT) under Double Tax Avoidance Agreements (DTAAs).

About Double Tax Avoidance Agreements (DTAAs)

DTAAs are treaties signed between two countries to prevent an individual or entity from being taxed twice on the same income in both jurisdictions.

It aims to provide relief by allotting taxing rights between the countries and setting terms for the tax relief on income that may be subject to double taxation.

In the case of India, DTAAs are essential tools for promoting international trade and investment. India has signed several DTAAs with countries like Mauritius, Singapore, Cyprus, and others.

Features of DTAAs:

• Tax Relief: DTAAs set the maximum tax rate that can be levied on various types of income (such as dividends, interest, royalties, and salary) in both countries to ensure that the taxpayers are not overburdened with excessive taxation.
• Elimination of Double Taxation: To eliminate the possibility of double taxation, the country of residence provides a tax credit for taxes paid to the foreign country on the same income.
• Dispute Resolution Mechanism: DTAAs often include provisions for resolving disputes over tax matters between countries, through processes like Mutual Agreement Procedures (MAP).
• Principal Purpose Test (PPT): It ensures that a taxpayer cannot claim benefits under a DTAA if the primary purpose of the arrangement is to avoid taxes. This helps prevent tax avoidance schemes.

Recent Guidelines

The Central Board of Direct Taxes (CBDT) has issued new guidelines on the applicability of the Principal Purpose Test (PPT) for claiming benefits under Double Tax Avoidance Agreements (DTAAs).

These guidelines will apply prospectively and clarify that the PPT provisions will not apply to past investments made under DTAAs with Cyprus, Mauritius, and Singapore.

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Source: 

THE HINDU