India has updated its Double Taxation Avoidance Agreement (DTAA) with Sri Lanka by introducing a new anti-abuse provision aimed at preventing the misuse of tax treaty benefits. The move is intended to curb treaty shopping and align the bilateral agreement with global standards for tackling tax avoidance.
The Ministry of Finance officially notified the amended protocol on Friday, confirming that the revised provisions came into effect on June 19, 2026, after both India and Sri Lanka completed the required legal formalities.
India Adds Principal Purpose Test to Tax Treaty
The most significant change to the India-Sri Lanka tax treaty is the inclusion of the Principal Purpose Test (PPT), a globally accepted anti-avoidance measure recommended under international tax reforms.
The PPT allows tax authorities to deny treaty benefits if they determine that one of the main purposes of a transaction or arrangement was to obtain tax advantages under the treaty.
The new provision is designed to discourage companies and individuals from creating artificial structures solely to benefit from lower tax liabilities.
New Rule to Apply From FY 2027-28
According to the revised agreement, the Principal Purpose Test will apply in India to income earned from Financial Year 2027-28 onwards.
Authorities will evaluate each case based on its facts and circumstances before deciding whether treaty benefits should be granted or denied.
However, the amendment also makes it clear that genuine commercial transactions undertaken in line with the objectives of the tax treaty will continue to enjoy the available tax relief.
Aim Is to Prevent Tax Avoidance, Not Increase Taxes
The updated protocol does not introduce any new taxes or modify the existing tax rates under the India-Sri Lanka Double Taxation Avoidance Agreement.
Instead, it adds an additional layer of protection against tax avoidance by ensuring that treaty benefits are available only for legitimate cross-border transactions.
The measure is expected to reduce opportunities for treaty shopping, where businesses route investments through specific jurisdictions primarily to claim tax benefits.
Treaty Aligned With Global Tax Standards
The inclusion of the Principal Purpose Test brings the India-Sri Lanka DTAA in line with international initiatives aimed at addressing Base Erosion and Profit Shifting (BEPS).
The amendment reflects the growing global focus on strengthening tax transparency and preventing multinational companies or investors from exploiting treaty provisions through artificial arrangements.
By incorporating internationally recognised anti-abuse rules, India and Sri Lanka aim to ensure that the tax treaty continues to support genuine economic activity while limiting opportunities for aggressive tax planning.
What the Amendment Means
With the revised protocol now in force, businesses and investors operating between India and Sri Lanka will need to ensure that their cross-border transactions have a genuine commercial purpose.
While legitimate investments and business arrangements will continue to receive treaty benefits, transactions primarily structured to gain tax advantages may no longer qualify under the updated rules.
The amendment represents another step in India’s ongoing efforts to modernise its international tax agreements and strengthen measures against tax avoidance without increasing the overall tax burden on compliant taxpayers.