India has strengthened its Double Taxation Avoidance Agreement (DTAA) with Sri Lanka by introducing new anti avoidance provisions designed to prevent treaty abuse, improve tax transparency and ensure that tax treaty benefits are available only for genuine commercial activities. The amended protocol has been brought into force following notification by India’s Ministry of Finance.

A key feature of the revised treaty is the introduction of the Principal Purpose Test (PPT), an internationally recognised anti avoidance mechanism. Under the new rule, tax authorities will be empowered to deny treaty benefits where one of the principal purposes of a transaction or business arrangement is found to be obtaining tax advantages, unless the arrangement is consistent with the objectives of the treaty.

The amendment is intended to eliminate opportunities for treaty shopping and double non taxation while continuing to protect legitimate cross border trade and investment. It also aligns the India Sri Lanka tax treaty with the Organisation for Economic Co operation and Development’s Base Erosion and Profit Shifting standards, reinforcing international efforts to combat tax avoidance.

Richa Sawhney, Partner at Grant Thornton Bharat, said the changes ensure that treaty benefits will not be used in cases involving treaty shopping or double non taxation. Amit Agarwal, Senior Partner at Nangia & Co LLP, noted that the revised framework places greater emphasis on demonstrating genuine commercial substance and business purpose behind investment structures.

The updated treaty is expected to strengthen tax cooperation between India and Sri Lanka, provide greater integrity to cross border investment and enhance confidence in the bilateral tax framework while supporting fair and transparent international business practices.