India has introduced an anti-abuse rule in its tax treaty framework with Sri Lanka

India has introduced an anti-abuse rule in its tax treaty framework with Sri Lanka

¨     India has introduced an anti-abuse rule in its tax treaty framework with Sri Lanka.

¨     The rule allows tax authorities to deny treaty benefits if obtaining those benefits was one of the principal purposes of an arrangement or transaction.

¨     A tax treaty is a bilateral agreement between two countries that allocates taxing rights on income such as dividends, interest, royalties, and business profits.

¨     India has signed Double Taxation Avoidance Agreements (DTAAs) with many countries to prevent double taxation and define tax treatment for cross-border income.

¨     An anti-abuse rule is a legal provision that prevents the misuse of tax treaties for unintended tax advantages.

¨     These rules primarily target treaty shopping, where income is routed through another jurisdiction to obtain lower tax rates or tax exemptions.

¨     The Principal Purpose Test (PPT) is a widely used anti-abuse standard in modern international tax treaties.

¨     Under the PPT, treaty benefits can be denied if one of the principal purposes of an arrangement is to obtain those benefits.

¨     India and Sri Lanka maintain tax treaty provisions to govern cross-border income, trade, investment, and financial transactions.

¨     The treaty is relevant for companies, investors, and residents engaged in bilateral economic activities.

Principal Purpose Test (PPT) is used