**India’s tax authorities get a new tool to crack down on treaty shopping**
India has quietly strengthened its tax treaty with Sri Lanka by introducing a Principal Purpose Test (PPT), a rule designed to combat treaty shopping and abuse of tax benefits. This move is part of a broader effort by the Indian government to prevent multinational corporations from exploiting tax loopholes.
The PPT rule, which will take effect from the 2027-28 fiscal year, empowers Indian tax authorities to deny benefits under the treaty if obtaining those benefits was a primary motivation for a particular arrangement. This means that if a multinational company is found to be using the treaty to gain a significant tax advantage, it may not be eligible for the benefits.
**Sri Lanka treaty among 85 amended by India so far**
India has amended over 85 tax treaties in recent years, and the PPT rule is part of its efforts to strengthen the tax framework. The Indian government has been trying to prevent companies from using tax treaties to shift profits to low-tax countries, which can result in a loss of revenue for the Indian exchequer. The PPT rule is designed to be a key tool in achieving this goal.
While the PPT rule may seem like a technical change, it has significant implications for multinational corporations operating in India. Companies that rely heavily on tax treaties for their operations will need to reassess their arrangements to ensure compliance with the new rule.
**What this means**
Companies operating in India with subsidiaries in Sri Lanka or other countries will need to carefully review their arrangements to ensure compliance with the new PPT rule. If caught using tax treaties to gain an unfair advantage, they may face penalties and reputational damage. As India continues to strengthen its tax framework, it’s likely that other countries will follow suit, and companies will need to adapt to this changing landscape.
