India and Sri Lanka Amend Tax Treaty to Curb Double Taxation Avoidance Abuse

India has amended its tax treaty with Sri Lanka to tighten loopholes in double taxation avoidance and curb revenue leakage by preventing treaty abuse. The amendment aims to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, particularly via treaty-shopping arrangements.

The amended protocol between the two countries came into force on June 19 this year and has now been notified by the Ministry of Finance. The provisions of the amended protocol will apply in India on income derived beginning April 1, 2027.

The revised treaty includes the Principal Purpose Test (PPT), an anti-avoidance tool. The PPT ensures denial of benefits under a double taxation avoidance agreement (DTAA) if it is reasonable to conclude that one of the principal purposes of an arrangement or transaction was to obtain a treaty benefit, unless granting the benefit aligns with the treaty's object and purpose.

This amendment brings the India-Sri Lanka tax treaty in line with international standards under the Base Erosion and Profit Shifting (BEPS) project. The PPT is already included in most of India's DTAAs through the Multilateral Instrument (MLI) or bilateral processes with countries such as Chile, Iran, Hong Kong, and China.