India amends tax treaty with Sri Lanka to plug avoidance, Pg15

Key Highlights:

• India has amended its Double Taxation Avoidance Agreement (DTAA) with Sri Lanka to address loopholes and prevent revenue leakage.
• The primary objective of the amendment is to curb tax evasion, avoidance, and treaty shopping practices.
• The amended protocol incorporates the Principal Purpose Test (PPT), an anti-avoidance tool.
• The protocol officially came into force on June 19, 2026.
• Its provisions will be applicable in India for income derived starting from April 1, 2027.

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Detailed Insights:

• The amendment specifically targets arrangements where benefits under the DTAA are sought indirectly by residents of third countries through treaty shopping.
• The PPT empowers tax authorities to deny treaty benefits if it is reasonably concluded that obtaining such benefits was one of the principal purposes of a transaction or arrangement, rather than genuine commercial reasons.
• This update aligns the India-Sri Lanka tax treaty with modern international tax standards, particularly those developed under the Organisation for Economic Co-operation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) framework.
• The revised preamble of the treaty now explicitly states its objective is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.
• India has been systematically updating its network of DTAAs to incorporate such anti-abuse provisions, reflecting a broader global shift towards greater tax transparency.

Key Concepts Involved:

• Double Taxation Avoidance Agreement (DTAA): A bilateral agreement between two countries to prevent income from being taxed twice in both countries.
• Principal Purpose Test (PPT): An anti-abuse rule in tax treaties that denies benefits if obtaining a tax advantage was a principal purpose of a transaction or arrangement.
• Treaty Shopping: A practice where an entity routes investments through a country with favorable tax treaties to reduce tax liabilities, often without substantial economic activity.
• Base Erosion and Profit Shifting (BEPS): Tax planning strategies used by multinational enterprises to exploit loopholes in tax rules to artificially shift profits to low or no-tax locations.