The Union Cabinet on Wednesday approved the signing and ratification of the protocol amending the agreement between India and Sri Lanka for the avoidance of double taxation and prevention of fiscal evasion in respect to taxes on income.
The move entails the updation of preamble text and inclusion of Principal Purpose Test, a general anti-abuse provision in the Double Taxation Avoidance Agreement (DTAA), which will result in curbing of tax planning strategies which exploit gaps and mismatches in tax rules.
An official release said that the existing DTAA between India and Sri Lanka was signed on January 22, 2013, and came into force on October 22 that year.
India and Sri Lanka are members of the Inclusive Framework and are required to implement the minimum standards under G-20 OECD BEPS (base erosion and profit shifting) Action Reports in respect of their DTAAs with Inclusive Framework countries.
Minimum standards under BEPS Action 6 can be met through the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) or through agreement bilaterally.
India is a signatory to the MLI. However, Sri Lanka is not a signatory to the MLI as of now.
"Therefore, amendment of the India-Sri Lanka DTAA bilaterally is required to update the preamble and also to insert Principal Purpose Test (PPT) provisions to meet the minimum standards on treaty abuse under Action 6 of G-20 OECD BEPS project," the release said.
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