The Ministry of Finance (MoF) on January 21, 2025, issued a notification regarding the Guidance for application of the Principal Purpose Test (PPT) under India's Double Taxation Avoidance Agreements.
The Multilateral Convention to Implement Tax Treaty-Related Provisions to Prevent Base Erosion and Profit Shifting (MLI) became effective for India on October 1, 2019. This significant development introduced modifications to several of India’s Double Taxation Avoidance Agreements (DTAAs). A central provision of the MLI is the Principal Purpose Test (PPT), designed to prevent treaty abuse and curb revenue leakage.
The PPT provision denies benefits under a DTAA if it is reasonable to conclude, based on relevant facts and circumstances, that one of the principal purposes of an arrangement or transaction was to obtain such benefits. However, the provision also allows taxpayers to establish that granting the benefits in those circumstances aligns with the object and purpose of the DTAA. The PPT ensures that tax treaties apply to genuine cases of economic activity, such as bona fide exchanges of goods, services, capital, and individuals.
The determination of whether an arrangement or transaction primarily seeks tax advantages under the PPT requires an objective assessment. This involves analyzing all relevant facts and circumstances to ascertain the intent behind the transaction. To provide clarity and certainty on the application of the PPT under India’s DTAAs, broad guidance has been issued, emphasizing alignment with the treaties’ objectives.
By implementing the PPT, India reinforces the integrity of its tax treaties, ensuring they fulfill their intended purpose while preventing misuse for tax avoidance.
[Notification No. 01/2025]
