Introduction
The Central Board of Direct Taxes (CBDT) has issued Circular 01/2025 to provide clarity on the Principal Purpose Test (PPT) in India’s Double Taxation Avoidance Agreements (DTAAs). This move aims to ensure uniformity in tax treaty interpretation while maintaining existing legal frameworks.
What is the Principal Purpose Test (PPT)?
The PPT is an anti-abuse provision included in many DTAAs to prevent treaty benefits from being misused. It denies tax benefits if obtaining such benefits was one of the principal purposes of a transaction, unless it aligns with the treaty’s intent.
Key Clarifications by CBDT
Limited Scope: The circular strictly applies to the PPT provision in DTAAs where it exists.
No Impact on Other Provisions: It does not override or interfere with General Anti-Avoidance Rules (GAAR), Specific Anti-Avoidance Rules (SAAR), Judicial Anti-Avoidance Rules (JAAR), or other DTAA provisions.
No New Interpretations: The circular does not introduce new legal principles but ensures a consistent interpretation of the PPT.
Implications for Taxpayers
Businesses must ensure that transactions have a genuine commercial purpose beyond just securing tax benefits.
Tax authorities will assess transactions based on substance over form, aligning with global anti-avoidance principles.
Companies engaged in cross-border transactions should review their tax structures to comply with the PPT framework.
Conclusion
CBDT’s Circular 01/2025 reinforces India’s commitment to curbing treaty abuse while maintaining tax certainty. Businesses should assess their transactions to ensure compliance with the PPT and broader anti-avoidance measures.
