India Notifies India-Sri Lanka DTAA Protocol Introducing Principal Purpose Test:

The Central Government, through the Ministry of Finance (Department of Revenue), issued Notification No. S.O. 3926(E) dated July 16, 2026, notifying the Protocol amending the India-Sri Lanka Double Taxation Avoidance Agreement (DTAA).

The original treaty was signed on January 22, 2013, while the amending Protocol was signed in New Delhi on December 16, 2024. The Protocol entered into force on June 19, 2026, after both countries completed their domestic legal procedures. It has been notified under Section 159(1) of the Income-tax Act, 1961.

The Ministry of Finance notified the Protocol amending the India-Sri Lanka DTAA by replacing the treaty preamble and introducing a comprehensive Principal Purpose Test (PPT).

The revised preamble clarifies that the treaty aims to eliminate double taxation without creating opportunities for double non-taxation, tax evasion, or treaty shopping, particularly for the indirect benefit of residents of third States.

The new PPT provides that treaty benefits may be denied where it is reasonable to conclude that obtaining such benefits was one of the principal purposes of an arrangement or transaction, unless granting the benefit is consistent with the object and purpose of the treaty.

The amendments will apply in India to income derived in fiscal years beginning on or after April 1, 2027, with corresponding application in Sri Lanka from the same assessment cycle.