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News: India amended its tax treaty with Sri Lanka to include the Principal Purpose Test (PPT) and prevent treaty abuse.
About Principal Purpose Test (PPT)
- The PPT is an anti-tax avoidance rule in Double Taxation Avoidance Agreements (DTAAs).
- Features:
- It allows tax authorities to deny treaty benefits if a main purpose of an arrangement is to gain a tax benefit.
- Treaty benefits are allowed only when the arrangement is genuine and consistent with the treaty’s purpose.
- It helps ensure DTAAs are used for legitimate trade, investment, and movement of people, not for tax avoidance.
- Change after revision: Now, tax authorities will be empowered to examine the commercial intent behind an investment structure and deny treaty benefits if obtaining a tax advantage is considered one of its principal purposes, unless the arrangement is consistent with the treaty’s object and purpose.
