India: Grandfathering provision under tax treaty is excluded from principal purpose test

Guidance clarifies the application of the principal purpose test (PPT) in Indian tax treaties with grandfathering provisions

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January 23, 2025

The Central Board of Direct Taxes (CBDT) on January 21, 2025, issued a circular clarifying the application of the principal purpose test (PPT) in Indian tax treaties with grandfathering provisions.

The circular addresses confusion regarding whether the PPT applies when income is not taxable in India due to these provisions. The CBDT clarified that grandfathering provisions in the treaties are excluded from the scope of the PPT provision.

Background

Several Indian tax treaties were recently amended to include the PPT to prevent treaty abuse. Some treaties, like the India-Singapore tax treaty, have grandfathering provisions that exempt certain income from taxation in India, such as capital gains on shares acquired before April 1, 2017.


Read a January 2025 report prepared by the KPMG member firm in India

Read a January 2025 report prepared by the KPMG member firm in Mauritius

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