The Central Government has notified the entry into force of the Protocol amending the Agreement between the Government of the Republic of India and the Government of the Democratic Socialist Republic of Sri Lanka for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.
The Protocol was signed at New Delhi on 16 December 2024 and has been notified through Notification No. 88/2026, dated 16 July 2026 issued by the Department of Revenue, Ministry of Finance.
The notification has been issued in exercise of the powers conferred under Section 159(1) of the Income-tax Act, 2025, for giving effect to all the provisions of the Protocol in India.
Protocol Entered into Force on 19 June 2026
Under Article 3 of the Protocol, India and Sri Lanka were required to notify each other, through diplomatic channels, about the completion of their respective domestic legal procedures.
The Protocol entered into force on 19 June 2026, being the thirtieth day after the date of the later notification confirming completion of the required procedures by the two countries.
In India, the provisions of the Protocol will have effect in respect of income derived during any fiscal year beginning on or after 1 April following the calendar year in which the Protocol entered into force.
Accordingly, the amended provisions will apply in India to income derived in fiscal years beginning on or after 1 April 2027. In Sri Lanka, the provisions will similarly apply to income derived in taxable years beginning on or after 1 April following the calendar year of entry into force.
Revised Preamble Emphasises Prevention of Treaty Abuse
The Protocol replaces the existing Preamble of the India–Sri Lanka Double Taxation Avoidance Agreement signed on 22 January 2013.
The revised Preamble clarifies that the Agreement seeks to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or tax avoidance.
It specifically covers arrangements involving treaty shopping, under which treaty benefits may be sought indirectly for the benefit of residents of third countries.
The revised language reflects the commitment of both countries to promote economic cooperation while ensuring that the tax treaty is not misused for obtaining unintended tax advantages.
Principal Purpose Test Incorporated
The Protocol also replaces paragraph 6 of Article 28 of the Agreement and incorporates a strengthened anti-abuse provision based on the Principal Purpose Test.
Under the revised provision, a treaty benefit shall not be granted in respect of an item of income where, after considering all relevant facts and circumstances, it is reasonable to conclude that obtaining such benefit was one of the principal purposes of an arrangement or transaction.
However, the benefit may continue to be available where it is established that granting the benefit would be consistent with the object and purpose of the relevant provisions of the Agreement.
The provision is intended to prevent artificial arrangements and transactions designed primarily to claim benefits under the tax treaty.
Strengthening International Tax Cooperation
The amended Agreement reinforces the framework for exchange of legitimate cross-border trade and investment between India and Sri Lanka while ensuring that treaty benefits are available only in genuine cases.
The Protocol aligns the India–Sri Lanka tax treaty with internationally accepted standards for preventing Base Erosion and Profit Shifting, treaty abuse and fiscal evasion.
The Protocol will remain in force for as long as the India–Sri Lanka Double Taxation Avoidance Agreement continues to remain effective.
The Notification can be accessed at: https://www.incometaxindia.gov.in/documents/d/guest/notification-88-2026-pdf
