India’s Cabinet approves agreement with Sri Lanka to avoid double taxation

Sri Lanka and India will sign a double tax avoidance agreement that aims to improve tax transparency and help curb tax evasion and avoidance. An official release said India-Sri Lanka signed the new DTAA on 22 January 2013, which came into force on 22 October that year. India and Sri Lanka are members of the Inclusive Framework and are required to implement the minimum standards for their DTAAs with Inclusive Framework Countries under the G-20 OECD BEPS (Base Erosion and Profit Shifting) Action reports.

Minimum BEPS Action Six requirements may be met through the Multilateral Convention for the Implementation of Tax-Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (MLI) or through bilateral agreement.

India is an MLI signatory. But as of now, Sri Lanka is not a signatory to the MLI. 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-20 OECD BEPS project

OSL Take: The commitment towards setting up an agreement to avoid double taxation by India to Sri Lanka indicates the close bilateral ties enjoyed by the two nations. Sri Lanka and India have an existing free trade agreement as well. India has played an active role as Sri Lanka’s development partner. Therefore, business opportunities between the two countries are very high.

Foreign businesses/investors interested in doing business with India could look at setting up bases in Sri Lanka to get the trade benefits enjoyed by Sri Lankan businesses in India. The ancient ties between the two nations have further strengthened through trade ties that have been benefited by a free trade agreement (FTA) between the two countries. While many Indian companies have formed joint ventures with local businesses, the Indian government has continuously assisted Sri Lanka in its program.

The trade relationship between Sri Lanka and India could be beneficial to foreign businesses/investors interested in doing business in the South Asian region as well as India. On the other hand, given Sri Lanka’s continuous efforts to develop its railway sector, foreign companies engaged in rail transport could explore business opportunities in Sri Lanka’s railway sector as well as help build additional facilities.

Sri Lanka already has a free trade agreement (FTA) with over ten countries, and the continued assistance would help build investment opportunities in various sectors. The move to further strengthen bilateral relations between Sri Lanka and India as well as the redoubling of trade promotions to invigorate efforts to reach the target of US$ 1 billion trade by 2020 are indications of the island nation becoming a hot spot for those looking at entering the Turkish market using the facilities available in the Pakistan–Sri Lanka Free Trade Agreement.

VBS/AT/02052020/TB_2