Double Taxation Avoidance Agreement (DTAA) in India

The Double Tax Avoidance Agreement (DTAA) is necessarily a bilateral agreement entered into between two countries. The basic motive is to promote and foster economic trade and investment between two Countries by avoidance of double taxation.

International double taxation has adverse impacts on the trade and services and on movement of capital and people. Taxation of the same income by two or more countries would constitute a prohibitive burden on the payer of tax. The domestic laws of most countries, including India, reduce this difficulty by affording unilateral relief in respect of such doubly taxed income (Section 91 of the Income Tax Act). But as this is not a satisfactory solution in view of the divergence in the rules for determining sources of income in different countries, the tax treaties try to remove tax obstacles that inhibit trade and services and movement of capital and persons between the countries concerned. It helps in improvement of the general investment climate.

The need for Agreement for Double Tax Avoidance arises because of conflicting rules in two different countries about chargeability of income on basis of receipt and accrual, residential status etc. As there is no clear definition of income and taxability thereof, which is approved internationally, an income may become liable to tax in two countries. Double taxation occurs when an individual is forced to pay two or more taxes for the same income, asset, or financial transaction in different countries. Double taxation occurs mainly due to overlapping tax laws and regulations of the countries where an individual operates his business.

The need for Agreement for Double Tax Avoidance arises because of conflicting rules in two different countries about chargeability of income on basis of receipt and accrual, residential status etc. As there is no clear definition of income and taxability thereof, which is approved internationally, an income may become liable to tax in two countries. Double taxation occurs when an individual is forced to pay two or more taxes for the same income, asset, or financial transaction in different countries. Double taxation occurs mainly due to overlapping tax laws and regulations of the countries where an individual operates his business.

  • The income is taxable only in one country.
  • The income is exempt in both countries.
  • The income is taxable in both countries, but credit for tax paid in one country is given against tax payable in the other country.

In India, Under Section 90 and 91 of the Income Tax Act, relief against double taxation is granted in two ways:

UNILATERAL RELIEF

Under Section 91, an individual can be relieved from double taxation by Indian Government irrespective of whether there is a DTAA between India and the other country concerned. Unilateral relief to a tax payer may be provided if:

  • The person or company has been a resident of India in last year.
  • In India and in another country with which there is no tax treaty, the income should have been taxable
  • The tax has been paid by the person or company under the statutory laws of the foreign country in question.

BILATERAL RELIEF

Under Section 90, the Indian government provides protection against double taxation by entering into a DTAA with another country, based on mutually acceptable terms.

SUCH RELIEF MAY BE OFFERED UNDER FOLLOWING TWO METHODS:

EXEMPTION METHOD: This assures complete avoidance of tax overlapping.

TAX CREDIT METHOD: This provides relief by giving the tax payer a deduction from the tax payable in India. DTAA CAN BE OF TWO TYPES.

A. COMPREHENSIVE DTAA: Comprehensive DTAAs are those which cover almost all types of incomes covered by any model convention. Many a time a treaty covers wealth tax, gift tax, surtax etc. too. DTAA Comprehensive Agreements with respect to taxes on income with following countries :

  • Armenia
  • Australia
  • Austria
  • Bangladesh
  • Belarus
  • Belgium
  • Brazil
  • Bulgaria
  • Canada
  • China
  • Cyprus
  • Czech Republic
  • Denmark
  • Egypt
  • Finland
  • France
  • Germany
  • Greece
  • Hashemite Kingdom of Jordan
  • Hungary
  • Indonesia
  • Ireland
  • Israel
  • Italy
  • Japan
  • Kazakstan
  • Kenya
  • Korea
  • Kyrgyz Republic
  • Libya
  • Malaysia
  • Malta
  • Mauritius
  • Mongolia
  • Morocco
  • Namibia
  • Nepal
  • Netherlands
  • New Zealand
  • Norway
  • Oman
  • Philippines
  • Poland
  • Portuguese Republic
  • Qatar
  • Romania
  • Russia
  • Saudi Arabia
  • Singapore
  • Slovenia
  • South Africa
  • Spain
  • Sri Lanka
  • Sudan
  • Sweden
  • Swiss Confederation
  • Syria
  • Tanzania
  • Thailand
  • Trinidad and Tobago
  • Turkey
  • Turkmenistan
  • UAE
  • UAR (Egypt)
  • UGANDA
  • UK
  • Ukraine
  • USA
  • Uzbekistan
  • Vietnam
  • Zambia

B. LIMITED DTAA: Limited DTAAs are those which are limited to certain types of incomes only, e.g. DTAA between India and Pakistan is limited to shipping and aircraft profits only. DTAA Limited agreements – With respect to income of airlines/merchant shipping with following countries:

  • Afghanistan
  • Bulgaria
  • Czechoslovakia
  • Ethiopia
  • Iran
  • Kuwait
  • Lebanon
  • Oman
  • Pakistan
  • People's Democratic Republic of Yemen
  • Russian Federation
  • Saudi Arabia
  • UAE
  • Uganda
  • Yemen Arab Republic

When an Indian person makes a profit or some other type of taxable gain or receives any income in another country, he may be in a situation where he will be needed to pay a tax on that income in India, as well as in the country in which the income was made. To protect Indian tax payers from this unfair practice, DTAA assures that India's trade and services with other countries, & also the movement of capital are not adversely affected. Acting under the authority of law,

ROLE OF TAX TREATIES IN INTERNATIONAL TAX PLANNING

  • Facilitates investment and trade flow, prohibiting discrimination between tax payers; Adds fiscal certainty to cross border operations; Prevents international evasion and avoidance of tax; Facilitates collection of international tax; Contributes acquisition of international development objective, and Avoids double taxation of income by allocating taxing rights between the source country where income arises and the country of residence of the recipient; thereby promoting cooperation between or amongst States in carrying out their responsibilities and guaranteeing the stability of tax burden.
  • Thus, tax incidence, becomes a necessary factor influencing the non-residents in deciding about the location of their investment, services, technology etc. Tax treaties serve the purpose of providing protection to tax payers against double taxation and therefore preventing the discouragement which taxation may provide in the free flow of international trade, international investment and international transfer of technology. Additionally, such treaties contain provisions for mutual exchange of information and for mitigating litigation by providing for mutual assistance procedure.
  • The agreements allocate jurisdiction between the source and residence country. Wherever such jurisdiction is given to both the countries, the agreements
  • Specify maximum rate of taxation in the source country which is generally lower than the rate of tax under the domestic laws of that country. The double taxation in such cases are prevented by the residence country agreeing to give credit for tax paid in the source country thereby reducing tax payable in the residence country by the amount of tax paid in the source country.
  • These agreements give the right of taxation in respect of the income of the nature of interest, dividend, royalty and fees for technical services to the country of residence. However, the source country is also given the right but such taxation in the source country has to be restricted to the rates specified in the agreement.
  • So far as income from capital gains is concerned, gains arising from transfer of immovable properties are taxable in the country where such properties are located. Gains arising from the transfer of movable properties forming part of the business property of a ‘permanent establishment ‘or the ‘fixed base‘is taxed in the country where such permanent establishment or the fixed base is placed.
  • So far as the business income is concerned, the source country gets the right only if there is a ‘permanent establishment‘ or a ‘fixed place of business’ there.
  • Income derived by rendering of professional services or other activities of independent character are taxable in the country of residence except when the person deriving income from such services has a fixed base in the other country from where such services are rendered.
  • The agreements also provides for jurisdiction to tax Director’s fees, remuneration of persons in Government service, payments received by students and apprentices, income of entertainers and athletes, pensions and social security payments and other incomes.
  • Sometimes, it may happen that owing to reduction in tax rates under the domestic law taking place after coming into existence of the treaty, the domestic rates become more favourable to the non-residents. Since the objects of the tax treaties is to benefit the non-residents, they have, under such circumstances, the option to be assessed either as per the provisions of the treaty or the domestic law of the land.
  • In order to avoid any demand or refund consequent to assessment and to facilitate the process of assessment, it has been provided that tax shall be deducted at source out of payments to non-residents at the similar rate at which the particular income is made taxable under the tax treaties.

What Rajput Jain & Associates Offers

We at Rajput Jain & Associates offer advisory services to Indian Clients, Multinational Clients having interest in India and NRI for better tax management keeping in view the laws of India as well as overseas countries and Double Taxation Avoidance Agreements (DTAA) if any executed.

For any further queries, please mail us to singh.swatantra@gmail.com

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