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Double Taxation Avoidance Agreements (DTAA)

The Double Tax Avoidance Agreements (DTAA)

is essentially bilateral agreements entered intobetween two countries, in our case, between India

and another foreign state. The basic objective is to

avoid, taxation of income in both the countries (i.e.

Double taxation of same income) and to promote

and foster economic trade and investment between

the two countries. The advantages of DTAA are as

under.

The advantage of DTAA are as under,a. Lower Withholding Taxes (Tax Deduction at Source)

b. Complete Exemption of Income from Taxes

c. Underlying Tax Credits

d. Tax Sparing Credits

The Provisions of DTAA override the general provisions of taxing statue of a

particular country. It is now well settled that in India the provisions of the

DTAA override the provisions of the domestic statute. Moreover, with the

insertion of Sec.90 (2) in the Indian Income Tax Act, it is clear that assessee

has an option of choosing to be governed either by the provisions of

particular DTAA or the provisions of the Income Tax Act, whichever aremore beneficial.

The Non Resident can certainly take the benefit of the provisions of DTAA

entered into between India and the country, in which he resides, more

particularly in respect of Interest Income from NRO account, Government

securities, Loans, Fixed Deposits with Companies and dividends etc. This is

explained below: -

For the Assessment Year 2008-2009,

Withholding Tax Rate (TDS) under the Indian Income Tax for Interest

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Income - 33.99% whereas,

Rate of Tax prescribed in the DTAA with the country where Non Resident

resides e.g. Singapore - 15%

Therefore, chargeable rate will be 15 % (Lower of the Two)

Every Non Resident should choose lower of the tax rate prescribed in DTAA

with the country where he resides and the tax rate prescribed under the Indian

tax laws.

Double taxation is the levying of tax by two or more jurisdictions on the

same declared income (in the case ofincome taxes),asset(in the case of

capital taxes), orfinancial transaction(in the case ofsales taxes). This double

liability is often mitigated bytax treatiesbetween countries.

The term 'double taxation' is additionally used, particularly in the USA, to

refer to the fact thatcorporateprofits are taxed and the shareholders of the

corporation are (usually) subject to personal taxation when they receivedividends or distributions of those profits. This use of the term 'double

taxation' is politically freighted since it selectively concatenates, out of all

describable sequences of taxation, two particular taxes on two particular

transactions.

Indiahas comprehensive Double Taxation Avoidance Agreements (DTAA )

with 82[4]countries. This means that there are agreed rates of tax andurisdiction on specified types of income arising in a country to a tax resident

of another country. Under the Income Tax Act 1961 of India, there are two

provisions, Section 90 and Section 91, which provide specific relief to

taxpayers to save them from double taxation. Section 90 is for taxpayers who

have paid the tax to a country with which India has signed DTAA, while

Section 91 provides relief to tax payers who have paid tax to a country with

which India has not signed a DTAA. Thus, India gives relief to both kind of

taxpayers.

A large number of foreign institutional investors who trade on the Indian

stock markets operate fromMauritius. According to thetax treatybetween

India and Mauritius, capital gains arising from the sale of shares are taxable

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in the country of residence of the shareholder and not in the country ofresidence of the company whose shares have been sold. Therefore, a

company resident in Mauritius selling shares of an Indian company will not

pay tax in India. Since there is nocapital gains taxin Mauritius, the gain will

escape tax altogether.

The Indian and Cypriot tax treaty is the only other such Indian treaty to

provide for the same beneficial treatment of capital gains.

It must be noted that India has and is making attempts to revise both the

Mauritius and Cyprus tax treaties to eliminate this favourable treatment of

capital gains tax. The Indian government periodically check for its DTAA

with many countries and come up with amendments.

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