India Amends Tax Treaty With Sri Lanka To Curb Treaty Abuse

India has updated its double taxation avoidance agreement (DTAA) with Sri Lanka to eliminate tax evasion and revenue leakage. The amended protocol officially entered into force on June 19, 2026, and will apply to income derived beginning April 1, 2027. The government aims to ensure that treaty benefits are not used for non-taxation or treaty-shopping purposes.

The core of this amendment is the introduction of the Principal Purpose Test. Tax authorities are now empowered to deny treaty benefits if the primary objective of an investment arrangement is to secure a tax advantage. Experts noted that this shift moves the tax regime from a reliance on objective legal documentation to a more subjective review of the commercial intent behind investment structures.

The inclusion of PPT aligns the India-Sri Lanka treaty with OECD-mandated standards to combat Base Erosion and Profit Shifting (BEPS). While this change increases compliance requirements for investors, it reinforces India's commitment to global tax transparency. Taxpayers are now advised to clearly substantiate the genuine commercial rationale underlying their cross-border structures to avoid potential scrutiny by revenue authorities.