Tuesday Jul 21, 2026
Tuesday Jul 21, 2026
Monday, 20 July 2026 05:28 - - {{hitsCtrl.values.hits}}
Sri Lanka and India have amended their Double Taxation Avoidance Agreement (DTAA) to introduce the internationally recognised Principal Purpose Test (PPT), empowering tax authorities in both countries to deny treaty-based tax benefits where one of the principal purposes of an investment or transaction is to obtain a tax advantage rather than support genuine commercial activity.
The amended protocol entered into force on 19 June after both countries completed their domestic legal procedures and has since been notified by Sri Lanka’s Finance Ministry. The revised provisions will apply in India to income derived from 1 April 2027.
The PPT is a key anti-tax avoidance measure developed under the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) framework. It allows tax authorities to refuse benefits available under the bilateral tax treaty if it is reasonable to conclude that securing a treaty-related tax advantage was one of the principal purposes of an arrangement or transaction, unless granting the benefit is consistent with the treaty’s object and purpose (https://www.ft.lk/top-story/Govt-in-the-dark-as-FDI-tax-incentives-become-obsolete/26-794423).
The amendment also revises the treaty’s preamble to clarify that the agreement is intended to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or tax avoidance.
For businesses operating between Sri Lanka and India, the changes mean treaty benefits will increasingly depend on whether investments and corporate structures are supported by genuine commercial substance rather than being established primarily to obtain favourable tax treatment.
The revised treaty shifts the focus from merely satisfying technical requirements, such as tax residency and documentation, to demonstrating a legitimate commercial rationale for cross-border arrangements.
The protocol aligns the India-Sri Lanka tax treaty with international tax standards under the OECD’s BEPS initiative and reflects the growing global emphasis on protecting tax revenues while facilitating genuine cross-border trade and investment.
