Taxing Governance: The Principal Purpose Test And The Corporatisation Of Treaty Abuse In India
- IJLLR Journal
- 5 hours ago
- 2 min read
Hemanya Pratap Singh & Tathagat Singh, LL.B. (Hons.), Jindal Global Law School, Sonipat
ABSTRACT
The Principal Purpose Test, incorporated in India’s Double Taxation Avoidance Agreements by virtue of the Multilateral Instrument (‘MLI’) since October 2019, has spawned a doctrinal development that legal literature is yet to acknowledge: far from a simple restructuring of India’s treaty anti-avoidance rules, it makes the legitimacy of the structuring of corporate entities across borders a question of tax law. From courts and tribunals merely asking if income was taxable, the issue now hinges on questions of why the entity was incorporated where it was, who directed its decisions, and whether the investment committee was independent. These questions are ultimately questions of corporate governance. This paper argues that along with the Supreme Court’s path-breaking ruling in Tiger Global International II Holdings v. Union of India, the ITAT’s first ruling on the PPT in SC Lowy P.I. (Lux) S.A.R.L. V. ACIT (2025) and CBDT Circular No. 1/2025, the PPT has brought about a corporatization of tax treaty anti-abuse: tax authorities scrutinize SPVs, holding companies, private equity fund vehicles, and cross-border M&A transactions through the prism of governance, for which corporate law never developed the necessary legal concepts. This paper analyses the impact of such a corporatization along three lines: (i) a profound expansion in the scope of due diligence and transactional documentation to convert governance evidence into primary tax proof; (ii) an uncoordinated double layer of jeopardy to investment structures through interaction between the PPT and GAAR; and (iii) evidence of pre-emptive investment behavioural change in the form of an unratified 2024 India-Mauritius Protocol. Four targeted reforms are proposed: PPT codification, a corporate substance safe harbor, an advance ruling mechanism, and parliamentary approval for treaty amendments, to restore structuring certainty that corporate governance requires.
