By: Staff Writer
July 26, Colombo (LNW): India’s latest amendments to its Double Taxation Avoidance Agreement (DTAA) with Sri Lanka are being viewed as a landmark shift in cross-border tax governance, signalling a tougher stance against tax avoidance while raising broader questions about Sri Lanka’s preparedness to meet evolving international tax standards.
The amended Protocol, signed on 16 December 2024 and entering into force on 19 June 2026, introduces provisions aimed at preventing businesses from exploiting tax treaties to minimise tax liabilities. India has confirmed that the revised rules will apply to fiscal years beginning on or after 1 April 2027.
At the centre of the reforms are two internationally recognised anti-abuse measures. The treaty’s preamble has been revised to emphasise that the agreement is designed to eliminate double taxation without encouraging tax evasion, treaty shopping or artificial tax reductions. More significantly, the agreement now incorporates the Principal Purpose Test (PPT), allowing tax authorities to deny treaty benefits if obtaining a tax advantage is deemed to be one of the principal reasons for establishing a particular business structure.
The changes align the treaty with the OECD/G20 Base Erosion and Profit Shifting (BEPS) Action 6 minimum standards, reflecting a wider global effort to combat aggressive tax planning. Deloitte Sri Lanka believes the reforms demonstrate the growing importance of commercial substance over legal form in international taxation.
Supporters argue the amendments could strengthen investor confidence by promoting transparency and discouraging artificial corporate structures. Genuine investors with legitimate commercial objectives are expected to continue enjoying treaty protections, while shell companies and conduit arrangements may find it increasingly difficult to access tax benefits.
However, the reforms also expose structural weaknesses in Sri Lanka’s own treaty framework. Unlike many countries, Sri Lanka has yet to adopt the Multilateral Instrument (MLI), meaning every tax treaty must be renegotiated individually. This bilateral approach risks creating inconsistencies across Sri Lanka’s network of tax treaties and may delay the country’s ability to align with rapidly evolving global tax standards.
Tax experts also caution that domestic anti-avoidance rules alone may not sufficiently address treaty abuse where outdated treaty provisions remain in force. Since eligibility for treaty benefits is largely determined by treaty language, the absence of modern anti-abuse clauses could create legal uncertainty for both investors and tax authorities.
The implications extend beyond holding companies. Financing structures, licensing arrangements, intra-group services and indirect transfers may all come under greater scrutiny as authorities increasingly assess whether transactions reflect genuine economic substance rather than merely satisfying technical legal requirements.
Charmaine Tillekeratne, Partner and Head of Tax at Deloitte Sri Lanka and Maldives, says businesses should view the changes as an opportunity to strengthen governance and ensure cross-border structures are built on genuine commercial purpose.
While stricter rules may increase compliance costs and require businesses to revisit existing arrangements, many analysts believe the long-term benefits—including stronger tax integrity, greater transparency and improved investor confidence—could outweigh the short-term challenges. For Sri Lanka, the treaty amendments may ultimately serve as a catalyst for wider tax treaty modernisation, helping protect the national tax base while supporting sustainable foreign investment.
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