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India-Sri Lanka Double Taxation Avoidance Agreement (DTAA)
The India-Sri Lanka Double Taxation Avoidance Agreement (DTAA) was signed on January 22, 2013, and came into force on October 22, 2013. The agreement aims to prevent tax evasion, treaty shopping practices, conduit company practices, and other forms of tax avoidance. Notably, while only India is a signatory to the Multilateral Convention, this DTAA aligns with Base Erosion and Profit Shifting (BEPS) and includes provisions agreed upon in the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI).
Applicability of the DTAA
The DTAA applies to the following taxes in the contracting states:
In India:
- Income tax, including any surcharge.
In Sri Lanka:
- Income tax, including the income tax based on the turnover of enterprises licensed by the Board of Investment of the country.
Key Takeaways
Here are some key takeaways from the India-Sri Lanka DTAA:
- Residency Criteria: A person who, under the laws of a state, is liable to tax therein due to domicile, residence, place of management, or other similar criteria is considered a resident of that state.
- Capital Gains: Capital gains arising from the sale of shares of an Indian company are taxable in India.
- Fees for Technical Services: Fees for technical services payable to a resident of Sri Lanka may be taxed at a rate of 10%, subject to satisfying the beneficial ownership test.
- Mutual Agreement: In cases where there is no clarity on any provision or action resulting in taxation not in line with the tax treaty, the matter is resolved by mutual agreement between the contracting states.
- Dividend Distribution Tax: India does not impose withholding tax on dividends. However, an Indian company paying dividends is subject to a 15% distribution tax, along with a 10% surcharge and 3% cess, as these taxes are not limited by tax treaties.
- Domestic Anti-Abuse Provisions: The DTAA allows domestic anti-abuse provisions to be applied by the contracting states. However, these benefits are granted only to the beneficial owner of income derived from the other contracting state.
- Interest Income: Income earned through interest may be taxed at a rate of 10%, subject to the satisfaction of the beneficial ownership test.
- MLI Alignment: The articles of the DTAA align with the provisions of the Multilateral Instrument (MLI) to implement tax treaty-related measures and prevent base erosion and profit shifting.
Inference
The India-Sri Lanka DTAA provides beneficial withholding rates for dividends, interest, royalty, and fees for technical services. However, these benefits are subject to anti-avoidance provisions. In addition to tax relief and lower withholding tax rates, the DTAA offers a lower dividend distribution tax, which is an additional tax levied on businesses. The treaty also includes a limitation of benefits clause. Furthermore, the treaty provides for tax credits in respect of taxes paid in a country, reducing the tax burden on taxpayers. The inclusion of an exchange of interest clause aims to help both states comply with international standards regarding transparency and reducing tax evasion.
For comprehensive legal support and advice regarding the India-Sri Lanka Double Taxation Avoidance Agreement or any other international tax matters, please contact Chandrawat & Partners. Our team of legal experts specializes in international tax law and is dedicated to providing tailored legal solutions to meet your specific needs. We are committed to delivering high-quality legal services and ensuring your satisfaction. If you have any questions or require assistance with legal matters, please do not hesitate to reach out. We are here to provide professional and dedicated service.
To know more about DTAA relations between India and Sri Lanka, please download our Guide.
