India amends tax treaty with Sri Lanka to plug avoidance

📌 Summary:

• India has amended its Double Taxation Avoidance Agreement (DTAA) with Sri Lanka to tighten loopholes and curb revenue leakage through treaty abuse and treaty-shopping
• Aim: eliminate double taxation WITHOUT creating opportunities for non-taxation or reduced taxation via evasion/avoidance
• The amended protocol came into force on June 19, 2026 and has now been notified by the Finance Ministry; its provisions apply in India to income derived from April 1, 2027
• Key change: insertion of the Principal Purpose Test (PPT) — an anti-avoidance tool that denies DTAA benefits where obtaining a tax benefit was one of the principal purposes of a transaction, unless it aligns with the treaty's object and purpose
• Effect: tax authorities can now examine the commercial intent behind an investment structure and deny benefits absent genuine commercial substance
• Context: PPT is an OECD MLI-mandated change; it is present in most Indian DTAAs via the MLI but was added to some (Chile, Iran, Hong Kong, China, and now Sri Lanka) through bilateral processes

🎯 UPSC Relevance: GS3 — public finance, tax policy, curbing tax avoidance; GS2 — India-Sri Lanka economic ties

📝 Prelims Facts:

• Amended India-Sri Lanka protocol in force June 19, 2026; applies in India from April 1, 2027
• Principal Purpose Test (PPT) is an anti-avoidance rule under the OECD Multilateral Instrument (MLI)
• DTAA = Double Taxation Avoidance Agreement

🔑 Key Term: Principal Purpose Test (PPT) — a general anti-avoidance rule that denies treaty benefits if securing a tax advantage was a principal purpose of the arrangement