India has amended its Double Taxation Avoidance Agreement (DTAA) with Sri Lanka by introducing new anti-avoidance measures aimed at preventing treaty abuse and strengthening tax transparency. The amended protocol entered into force on 19 June 2026 and will apply in India to income derived from 1 April 2027.
The amendment aligns the bilateral tax treaty with internationally recognized tax standards and is intended to ensure that treaty benefits are available only to genuine cross-border commercial activities.
A key feature of the updated treaty is the introduction of the Principal Purpose Test (PPT). This internationally recognised anti-avoidance rule allows tax authorities to deny treaty benefits if it is reasonable to conclude that obtaining those benefits was one of the principal purposes of an arrangement or transaction, unless granting the benefit is consistent with the purpose of the treaty.
The revised provisions are designed to eliminate double taxation while reducing opportunities for tax evasion, tax avoidance, and treaty shopping.
For businesses and investors operating between India and Sri Lanka, the amended treaty places greater emphasis on genuine commercial purpose and economic substance.
Investors should ensure that their business structures reflect real commercial activities rather than arrangements created primarily to obtain tax advantages. The changes also highlight the importance of proper tax planning, regulatory compliance, and maintaining adequate documentation for cross-border investments.
While the treaty continues to support cross-border business, investors should review their existing and future investment arrangements to ensure they remain aligned with the updated requirements.
The amended treaty reflects the global shift towards greater transparency in international taxation and the prevention of treaty abuse. By aligning with internationally recognised standards, the updated framework reinforces the importance of responsible investment practices and genuine commercial operations.
For investors with legitimate business activities, the revised treaty provides greater clarity on the standards expected when claiming treaty benefits while encouraging sound investment planning and compliance.
As international tax regulations continue to evolve, businesses and investors engaged in India–Sri Lanka cross-border transactions should stay informed about regulatory developments and assess whether their investment structures meet the updated treaty requirements before the new provisions become applicable in India from 1 April 2027.
Understanding these changes can help investors make informed decisions while supporting compliant and sustainable cross-border investments.
For investment inquiries, contact DPR Investment:
📞 +94 77 762 1542
✉️ info@dprinvestments.lk
