India retains flexibility to have more provisions in its bilateral tax treaties to address tax concerns


India has decided to retain the flexibility to have more stringent provisions its bilateral tax treaties to be able to curb tax abuse more effectively.

This will allow New Delhi to negotiate limitation of benefit clause like the one it has in tax treaty with Singapore to restrict treaty advantages to genuine investors.

Conditions such as a minimum level of investment, listing on the local stock exchange, ceiling on turnover and minimum expenditure, local residents on board, number of board meetings for carrying out operations in one of the contracting states can be imposed on investors to prevent tax abuse. Tax treaties have been used by third country investors to route their investments to lower tax liability or by local investors to round-trip funds.


India had faced the issue under its tax treaty with Mauritius, which was amended in 2016.

New Delhi has submitted its instrument of ratification for Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting or MLI under the aegis of OECD.

It has deposited its list of reservations and notifications as per the country positions released by the OECD. India proposes to impose the MLI on October 1, 2019.

India has accepted the application of Principal Purpose Test or PPT as an interim measure to prevent treaty abuse, along with the possibility to adopt limitation of benefits provisions in addition to or as replacement of PPT, through bilateral negotiation. Further, India has also chosen to apply Simplified LOB provision.

Tax experts say this would give more flexibility to India to address its tax concerns.

“India thus retains the option to, amend its existing treaties to incorporate LOB provisions where deemed necessary, in addition to or as replacement of PPT. This gives India further flexibility to modify or incorporate measures to ensure prevention of treaty abuse,” said Mridhu Malhotra, director, Nangia Advisors(Andersen Global) .

PPT is seen as being very generic that typically leads to questioning of intention behind a structure or a transaction sans any specific criterion. India has always supported LOB has preferred approach.

“Having detailed LOB is a more objective criterion than a PPT,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP.

The final notification now also includes India’s DTAA with Hong Kong in the list of agreements with which India wishes to be covered by the MLI Convention while removing the treaty with China from the list of agreements.

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