India tightens Sri Lanka tax treaty with anti-abuse rule

New Delhi: India has tightened the tax treaty framework with Sri Lanka by introducing an anti-abuse rule that allows authorities to deny treaty benefits where obtaining such benefits was one of the principal purposes of an arrangement or transaction.

The Ministry of Finance notified the Protocol amending the India-Sri Lanka tax treaty on Friday, after the amendment entered into force on June 19, 2026, following completion of legal procedures by both countries.

The amended India-Sri Lanka Double Taxation Avoidance Agreement (DTAA) now includes a Principal Purpose Test (PPT), aimed at preventing treaty shopping and artificial structures created mainly to secure tax advantages. The rule will apply to income arising from financial year 2027-28 onwards in India.


Under the revised provision, treaty benefits can be refused if, based on the facts and circumstances, it is reasonable to conclude that obtaining the benefit was one of the principal purposes of the arrangement. However, benefits will continue to be available where granting them is consistent with the object and purpose of the relevant treaty provisions.

The amendment does not revise tax rates or create new taxes under the India-Sri Lanka agreement. Instead, it adds an anti-avoidance layer to the treaty, aligning it with international efforts to curb base erosion and profit shifting.