- India notified a new protocol adding a Principal Purpose Test to the India–Sri Lanka DTAA.
- The amendment allows authorities to deny tax treaty benefits if securing them was a primary motive.
- The revised anti-abuse provisions will apply to income earned starting April first, twenty twenty-seven.
India’s Central Board of Direct Taxes (CBDT) notified a protocol adding a Principal Purpose Test to the India–Sri Lanka DTAA on July 16, 2026, allowing treaty benefits to be denied when securing them was one of an arrangement’s principal purposes.
The measure carries notification number No. 88/2026-Income Tax (S.O. 3926(E)). The Department of Revenue issued it through the Ministry of Finance.
The protocol had already entered into force on June 19, 2026, after India and Sri Lanka completed the required legal procedures. Its provisions apply to income derived in taxable years beginning on or after April 1, 2027.
Free toolSubstantial Presence Test CalculatorTreaty rates stay the same. The protocol does not impose a new tax.
The change instead gives tax authorities a new way to examine arrangements that appear designed mainly to secure treaty relief. Genuine commercial structures can continue to receive benefits when granting them fits the agreement’s object and purpose.
“The Preamble of the Agreement shall be replaced. Intending to eliminate double taxation. without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty shopping arrangements).”
The notification contains that language as part of the amended agreement.
The revised treaty asks why an arrangement was created
The new anti-abuse provision replaces Article 28, Paragraph 6. It permits authorities to refuse a treaty benefit where it is reasonable to conclude that obtaining the benefit was “one of the principal purposes” of a transaction or arrangement.
The test therefore examines purpose as well as form. Meeting the technical conditions for a benefit may not be enough if the arrangement was structured principally to obtain that benefit.
Treaty shopping involves residents of third countries seeking indirect access to the India-Sri Lanka agreement. The revised preamble expressly refers to treaty shopping and to the risk of non-taxation or reduced taxation through evasion or avoidance.
A bona fide structure may still qualify. The agreement preserves relief where granting the benefit would be consistent with its object and purpose.
That distinction places commercial substance at the center of future reviews. Cross-border businesses may need to show why an arrangement exists, how it operates and what non-tax reasons support it.
Entry into force comes before the 2027 income date
The protocol became legally effective between the two countries on June 19, 2026. India’s domestic application date is later, beginning April 1, 2027.
India applies the amendment to income arising in fiscal years beginning on or after that date. Sri Lanka applies it to income derived in taxable years beginning on or after April 1, 2027.
The two dates perform different functions. Entry into force completed the treaty amendment between the governments, while the April 2027 rule identifies when the revised treatment applies to income.
The provisions are intended to operate prospectively. Earlier Circulars, including Circular No. 01/2025, stated that PPT provisions generally apply prospectively, giving existing long-term investments a defined period before covered income faces the new standard.
Businesses still face a practical preparation issue. Multinational entities and cross-border investors may need more documentation to establish the commercial substance and business purpose of their arrangements.
India amended the treaty bilaterally
The underlying agreement was signed on January 22, 2013, and entered into force on October 22, 2013. The new protocol updates that agreement after international efforts to strengthen protections against treaty abuse.
Sri Lanka is not a signatory to the Multilateral Instrument, or MLI. India has been a signatory since 2019, but the two countries used a bilateral protocol to update their treaty.
The amendment brings the agreement into line with the G20-OECD Base Erosion and Profit Shifting, or BEPS, Action 6 minimum standards. That work targets arrangements that use treaty networks to obtain benefits without a corresponding commercial or economic basis.
The bilateral route also reflects the countries’ broader relationship. The protocol was discussed against the backdrop of India’s “Neighbourhood First” policy and the India-Sri Lanka Economic Partnership Agreement framework.
The signing took place in New Delhi on December 16, 2024. Prime Minister Narendra Modi and Sri Lankan President Anura Kumara Dissanayake affirmed the protocol during Dissanayake’s state visit that day.
Existing rates remain unchanged as scrutiny rises
The protocol does not revise treaty tax rates. It also does not introduce a separate levy or a new category of tax.
Its effect comes from the conditions surrounding existing relief. Authorities can assess whether obtaining a benefit formed one of the principal purposes of a transaction, even when the transaction appears to satisfy other treaty requirements.
Tax experts have described the intent-based test as potentially subjective. They have also said it follows international practice, including similar updates to treaties involving Mauritius and Singapore.
The additional scrutiny may affect the records maintained by companies and investors. Evidence of commercial operations, financing needs and the wider purpose of a structure could become relevant when authorities assess a treaty claim.
The revised language is designed to prevent the agreement from producing double non-taxation. At the same time, the treaty’s stated purpose continues to include the elimination of double taxation.
That combination leaves the benefit available for legitimate activity but gives authorities a basis to challenge arrangements where tax relief appears to drive the structure.
The notification relies on the 2025 income-tax law
The Finance Ministry issued the notification under Section 159(1) of the Income-tax Act, 2025. The measure therefore uses the newer statutory framework rather than the previous reference to the 1961 Act.
Ravi Agrawal, chairman of the tax board, was re-appointed on June 30, 2026, for a six-month term running from July 1 to December 31, 2026. He is the senior-most Indian Revenue Service official responsible for administrative planning at the time of the notification.
Union Finance Minister Nirmala Sitharaman said during the 2026 Union Budget that “transparency and anti-abuse provisions in tax treaties are critical for India’s fiscal integrity.”
The notification also arrives as India reported a 14.64% year-on-year increase in net direct tax collections as of June 2026. The treaty amendment forms part of a wider period of increased attention to tax compliance.
The next operational milestone is April 1, 2027. Income arising from fiscal years beginning on or after that date will fall under the amended treaty framework in India.
This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional or CPA about your specific situation.
