No objection to this being the Dominion catalyst, but we need to be careful about timelines.

What's the date of the letter - if we want to use it as out driver for the change in policy then  it has to arrive in London fairly early on (40, early 41 at the latest). London will need to chew the matter over and agree a policy change and that'll take time (and in my opinion we'll want to add a month to the decision making timeframe to account for talking Churchill - an "old fashioned" Imperialist -round to accepting the idea).

We'll also need to ensure that it fits in with the events we've already started (Cripps Mission and subsequent politicing in India/Ceylon) timeline wise.

Something else to consider - what is he effect on the FRENCH colonies when word gets out that Britain is offering Dominion status (something without a French equivilent). Do French colonies start demanding privoleges? Do the French Govt see it as Perfidious Albion trying to destabalise the remnants of the French Empire?