Why in the News? 

The Central Board of Direct Taxes (CBDT) issued new guidelines for applying the Principal Purpose Test (PPT) under Double Tax Avoidance Agreements (DTAAs). 

What is the Principal Purpose Test (PPT)?

• The PPT is a mechanism under BEPS (Base Erosion and Profit Shifting) Action Plan 6, aimed at preventing misuse of tax treaties. 
• It ensures treaty benefits are granted only if the primary purpose of transactions aligns with the treaty's intended objectives. 

 Why the New Norms? 

1. Clarifying Scope: Addresses the ambiguity in applying the PPT in treaties with bilateral commitments (e.g., India-Mauritius DTAA). 
2.  Grandfathering Provisions: Specific provisions under existing treaties will take precedence over the PPT. 
3.  Applicability: Provisions will apply prospectively from April 1, 2025 and exclude cases where bilateral commitments override. 

 Implications 

• For Taxpayers: 
  • Greater clarity in interpreting treaty provisions. 
  • Assurance for entities availing grandfathered benefits under select treaties. 
• For Authorities: 
  • Aligns with UN Model Tax Convention and international best practices for tackling treaty abuse. 
• Global Relations: 
  • Strengthens India’s compliance with global BEPS standards while honoring past commitments.