| Introduction: Contextual Introduction Body: Role of grandfathering provisions in India’s DTAAs and how PPT interacts with grandfathering. Conclusion: Way forward |
India’s amendments to its Double Taxation Avoidance Agreements (DTAAs) with Mauritius, Singapore, and Cyprus were pivotal in addressing treaty abuse and ensuring fair taxation. These amendments included the introduction of source-based taxation of capital gains while incorporating grandfathering provisions to protect investments made before specific dates. The PPT is a general anti-avoidance rule (GAAR) introduced under BEPS Action Plan 6 to combat treaty abuse. It denies treaty benefits if obtaining such benefits was the principal purpose of a transaction or arrangement.
Key Aspects of Grandfathering Provisions
- Scope of Grandfathering:
- Mauritius and Singapore: Investments in shares made before April 1, 2017, continue to enjoy tax exemption on capital gains under the original treaty provisions.
- Cyprus: Similar protection is extended to investments made before April 1, 2017, as per its amended DTAA.
- Purpose and Significance:
- Protects legitimate expectations of investors by preventing retroactive taxation.
- Reflects India’s commitment to bilateral treaty obligations, thus fostering investor confidence.
- Balances India’s anti-avoidance objectives with its need to remain an attractive investment destination.
- CBDT Guidance Note on Grandfathering Provisions:
- Reaffirms that treaty-specific grandfathering commitments take precedence over PPT provisions.
- Ensures these provisions are not influenced by the PPT, preserving the sanctity of bilateral commitments.
Interaction of PPT with Grandfathering Provisions
- Carving Out Grandfathering from PPT: The CBDT guidance explicitly clarifies that investments protected under grandfathering provisions are excluded from PPT scrutiny. This ensures that treaty-specific commitments remain insulated from broader anti-abuse measures, maintaining clarity for pre-existing investments.
- Prospective Application: PPT provisions will apply only to investments or transactions made after the enforcement of the new protocol. This avoids retrospective application, reinforcing legal certainty.
- Alignment with BEPS and UN Model Tax Convention: Tax authorities are guided to refer to BEPS Action Plan 6 and the UN Model Tax Convention for consistency in applying the PPT, ensuring international best practices are followed.
Conclusion
Grandfathering provisions in India’s DTAAs with Mauritius, Singapore, and Cyprus exemplify the balance between adhering to treaty-specific bilateral commitments and implementing anti-abuse measures like the PPT. By carving out pre-committed investments from the PPT’s purview, India reassures investors of its respect for treaty obligations while focusing the PPT on curbing future treaty abuse. This nuanced approach preserves investor confidence, aligns with global tax principles, and bolsters India’s reputation as a stable investment destination.
