India amends tax treaty with Sri Lanka to plug avoidance
The Department of Revenue, Ministry of Finance, notified (Notification No. 88/2026, dated July 16, 2026) the protocol amending the 2013 India-Sri Lanka tax treaty
The protocol was signed in New Delhi on December 16, 2024, and entered into force on June 19, 2026
The amendment inserts a Principal Purpose Test (PPT) anti-abuse clause, replacing paragraph 6 of Article 28 of the original agreement, and revises the treaty's preamble to clarify that its objective is to prevent double taxation without enabling avoidance, evasion, or treaty shopping
The amended provisions apply in India to income of fiscal years beginning on or after April 1, 2027, and in Sri Lanka to taxable years beginning on or after April 1, 2026
Double Taxation Avoidance Agreements (DTAAs) and Section 90 of the Income Tax Act
A DTAA is a bilateral agreement between two countries to prevent the same income from being taxed twice, typically through the exemption method or the tax-credit method. In India, the Central Government is empowered to enter into such agreements under Section 90 of the Income Tax Act, 1961, and to notify their terms so they have legal effect domestically.
Key Details
- India's DTAA with Sri Lanka was first signed on January 22, 2013, entering into force on October 22, 2013 — replacing an earlier 1982 treaty between the two countries
- DTAAs typically cover residence rules, permanent establishment (PE), withholding rates on dividends/interest/royalties, and mutual agreement procedures (MAP)
- India maintains a wide network of DTAAs and Tax Information Exchange Agreements (TIEAs) with partner jurisdictions
The 2026 protocol does not replace the 2013 DTAA outright — it amends specific anti-abuse provisions within the existing Section 90-notified agreement, tightening its safeguards against misuse.
Principal Purpose Test (PPT) — BEPS Action 6 and Treaty Shopping
The PPT is an anti-abuse standard developed under the OECD/G20 Base Erosion and Profit Shifting (BEPS) Action 6 report, which targets "treaty shopping" — routing income through a treaty-partner jurisdiction merely to access favourable treaty benefits with no genuine economic substance. Under the PPT, a treaty benefit can be denied if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of an arrangement, unless granting it would still be in accordance with the object and purpose of the treaty.
Key Details
- PPT is one of the four BEPS minimum standards and is incorporated into treaties either via the Multilateral Instrument (MLI) or via bilateral protocols like this one
- The MLI (to which India applies the PPT plus a simplified Limitation of Benefits clause under Article 7) entered into force for India on October 1, 2019, modifying many of India's covered DTAAs
- The Central Board of Direct Taxes (CBDT) issued a circular (January 24, 2025) providing guidance on consistent application of PPT by taxpayers and tax authorities
Since the India-Sri Lanka amendment was carried out as a stand-alone bilateral protocol rather than through the MLI, it shows India also uses direct treaty renegotiation — alongside the MLI route — to insert BEPS-standard anti-abuse clauses into its tax treaty network.
CBDT and Treaty Administration
The Central Board of Direct Taxes, functioning under the Department of Revenue, Ministry of Finance, is the apex body administering direct tax laws in India, including treaty notifications, circulars, and guidance on international tax matters.
Key Details
- CBDT operates under the Central Boards of Revenue Act, 1963
- Notifications under Section 90 (like Notification No. 88/2026 for this protocol) give treaty amendments the force of law in India
- CBDT also administers India's Advance Pricing Agreement (APA) programme and General Anti-Avoidance Rule (GAAR), both aimed at curbing tax avoidance
The July 16, 2026 notification is the domestic legal instrument through which the internationally negotiated protocol becomes enforceable for Indian taxpayers.
- Protocol signed: December 16, 2024, New Delhi
- Protocol entered into force: June 19, 2026
- Domestic notification: No. 88/2026, dated July 16, 2026 (Department of Revenue)
- Effective in India: fiscal years beginning on or after April 1, 2027
- Effective in Sri Lanka: taxable years beginning on or after April 1, 2026
- Original India-Sri Lanka DTAA: signed January 22, 2013; in force October 22, 2013 (replaced the 1982 treaty)
- MLI in force for India since October 1, 2019
- Provision amended: Article 28, paragraph 6 (replaced with the PPT clause)