India has strengthened its tax treaty with Sri Lanka, introducing an anti-abuse provision that allows tax authorities to deny treaty benefits when obtaining them was one of the principal purposes of a transaction, according to reporting by Indian financial media.
India’s Ministry of Finance notified the protocol amending the India–Sri Lanka Double Taxation Avoidance Agreement (DTAA), Moneycontrol reported. The protocol, signed in New Delhi in December 2024, entered into force on June 19, 2026 after both countries completed the required legal procedures.
The central feature of the amendment is the Principal Purpose Test (PPT), an internationally recognised anti-avoidance measure aimed at curbing “treaty shopping” — the use of artificial structures set up primarily to obtain tax benefits. Under the revised treaty, relief may be refused where authorities conclude, based on the facts, that securing the benefit was a principal purpose of an arrangement, while genuine transactions consistent with the treaty’s intent continue to qualify.
The change does not alter tax rates or impose new taxes, Business Today reported, but adds a safeguard aligning the bilateral treaty with global standards against base erosion and profit shifting. In India, the provisions will apply to income arising from the 2027-28 financial year onwards.
The amendment tightens the framework governing cross-border investment and income flows between the two neighbours, which maintain close trade and financial ties.
