Big change in India-Sri Lanka tax treaty, know what will be the impact on companies and investors?

The Government of India has taken a big step to stop tax evasion and wrongful availing of tax exemptions. The Central Government has made changes in the Double Taxation Avoidance Agreement (DTAA) between India and Sri Lanka. Under this change, such a new rule has now been implemented, due to which transactions or business structures done only for the purpose of saving tax will not get the benefit of tax treaty.

The Finance Ministry issued the official notification of this amendment on Friday. After the completion of the legal processes of both the countries, this amendment has come into effect from June 19, 2026. However, in India, its impact will be visible on the income from the financial year 2027-28.

Government added this rule

In this change, a new rule named Principal Purpose Test (PPT) has been added. To understand in simple language, if the tax authorities feel that the main purpose of any transaction or arrangement of a company or individual was only to get tax exemption, then it can be deprived of the benefits under the India-Sri Lanka tax treaty.

If we understand by example, if a company invests in Sri Lanka by forming a paper company just to pay less tax and it has no real business there, then after investigation it will not get the benefit of tax exemption. This means that now it will not be easy to try to save tax through companies created only on paper.

These companies are not worried

The government has also made it clear that companies and investors whose business is completely genuine and in accordance with the rules, do not need to worry. If the purpose of a transaction is genuine trade, investment or economic activity and it is in accordance with the spirit of the tax treaty, then they will continue to get the benefits of the tax treaty as before.

No new tax was imposed

The thing to note is that no new tax has been imposed under this amendment nor has any change been made in the existing tax rates. It has only been ensured that tax treaties are not misused and artificial structures created to avoid tax can be stopped.

Experts believe that this change is part of the ongoing efforts at the international level, which are aimed at curbing activities like tax evasion, shifting of profits to other countries and reducing the tax base. This will make the tax system more transparent and the investment environment between the two countries will also be more reliable.

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