INDIA- SRI LANKA DOUBLE TAXATION AVOIDANCE AGREEMENT

The Double Taxation Avoidance Agreement (“DTAA”) between India and Sri Lanka was signed on January 22, 2013, and entered into force from October 22, 2013. Despite only India being a signatory to the Multilateral convention, the DTAA is aligned with Base Erosion and Profit Shifting (“BEPS”) and inclusive of the provisions agreed upon in the ‘The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting’ (“MLI”). The DTAA has been signed between the contracting states to curb tax evasion/ avoidance, treaty shopping practices, conduit companies practices, etc.  

Applicability

The DTAA applies to the following taxes in the contracting states:

1. In India- the Income tax, including any surcharge thereon; and
2. In Sri Lanka- Income tax including the income tax based on the turnover of enterprise licensed by the board of investment of the country.

Key takeaways

1. Any person who under the laws of that state or any political sub-division or local authority thereof is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature is recognized as a resident of that state.
2. Capital gain arising on sale of shares of an Indian company are liable to be taxed in India.
3. Fees for technical services payable to a resident of Sri Lanka, may be taxed at the rate of 10%, subject to the satisfaction of the beneficial ownership test.
4. In case, there is no clarity on any provision or action which gives rise to taxation not in accordance with the tax treaty, it shall be dealt with as is decided by mutual agreement between the contracting states.
5. India does not impose withholding tax on dividends. However, tan Indian company paying dividends is subject to a 15% distribution tax, as well as a 10% surcharge and 3% cess as these taxes are not limited by tax treaties.
6. The DTAA provides that domestic anti-abuse provisions may be applied by the contracting states, however, these benefits are granted only to the beneficial owner of the income derived from the other contracting state.
7. Income earned by way of interests, may be taxed at the rate of 10%, subject to the satisfaction of the beneficial ownership test.
8. Articles of the DTAA are aligned with the provisions of Multilateral Instrument or MLI so as to implement tax treaty related measures and prevent base erosion and profit shifting.

Inference

The tax treaty provides beneficial withholding rates in case of dividend, interest, royalty, and fees for technical services. However, such beneficial provisions are subject to anti-avoidance provisions. Aside from tax relief and lower withholding tax rates, the DTAA additionally offers a lower dividend distribution tax which is an additional tax levied on businesses. The DTAA also inculcates a limitation of benefit clause. Additionally, the treaty provides for tax credit in respect of taxes paid in a country so as to reduce the tax burden on the taxpayers. Further, an exchange of interest clause has been inculcated in the DTAA on the premise that it will help both the states to comply with international standards with respect to transparency and reducing tax evasion.