International Tax Services

The Double Tax Avoidance Agreement (DTAA) is fundamentally a bilateral agreement entered into by two countries. The primary motive is to encourage and foster economic trade and investment between the two countries by avoiding double taxation.

It has adverse consequences on trade and services, and the movement of capital and people. The taxation of the same income by two or more countries would constitute a restrictive weight on the innocent taxpayer. The domestic laws of most of the countries lessen the complexity by affording a unilateral remedy in respect of such double-taxed income. However, as this is not a satisfactory and pleasing solution, given the divergence in the rules for determining the sources of income in different countries, the tax treaties try to remove tax obstacles that hinder trade movement and services and the movement of capital and persons between the countries concerned. 

The need for an agreement for Double Tax Avoidance arises because of different rules in two distinct countries about the chargeability of income on the receipt and accrual basis, or the residential status. As there is no precise definition of the income and taxability thereof, which is approved internationally, a salary may become liable to tax in two countries. It occurs when an individual is bound to pay two or more taxes for the same income, asset, or financial transaction in different countries of the world.

The double taxation occurs mainly due to the overlapping tax laws and the rules and regulations of the countries where an individual operates their business. The income is taxable only in one country. The income is exempt in both countries. The income is taxable in both of the countries, but the credit for the tax paid in one country is given against the tax payable in the other country.

 Reliefs against Double Taxation

In India, Sections 90 and 91 of the Income Tax Act grant relief against double taxation in two ways, as detailed below:

1. Unilateral Relief

Under Section 91 of the said Act, an individual can be relieved from double taxation by the Indian government, irrespective of whether there is a DTAA between India and the other country concerned. The unilateral relief to a taxpayer may be provided if:

• The person or company was a resident of India in the previous financial year.
• In India and in some other countries 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.

 2. Bilateral Relief

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

 Types of DTAA

1. Comprehensive DTAA:

Comprehensive DTAAs are those that cover almost all the types of incomes covered by any model convention. Many a time, a treaty includes wealth tax, gift tax, surtax, etc., too. DTAA Comprehensive Agreements concerning taxes on income with the following countries-

• 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

 2. Limited DTAA:

Limited DTAAs are those who are limited to certain types of income only.

The DTAA Limited agreements– For income of airlines/merchant shipping with the following countries:

• Afghanistan
• Bulgaria
• Czechoslovakia
• Ethiopia
• Iran
• Kuwait
• Lebanon
• Oman
• Pakistan
• People’s Democratic Republic of Yemen
• Russian Federation
• Saudi Arabia
• Switzerland
• 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 tax on that income in India, as well as in the country in which the income was made. To protect Indian taxpayers 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.

Claiming Treaty Benefits for International Business

The taxability of non-residents is to be examined under the Income-tax Act, 1961, vis-à-vis the Double Taxation Avoidance Agreement (“DTAA”). He can decide between the two, whichever is more beneficial and advantageous.

With the world becoming a local economy, the overseas income is also chargeable to tax in many of the cases in India. Since the income may be taxed in both places, this paves the way for a foreign tax credit, as there would be double taxation. The countries have entered into a DTAA to prevent such excessive double taxation. 

Ajay D Kumar & ASSOCIATES is the best DTAA Consultant in Delhi, providing end-to-end solutions. Our expert team helps companies to analyse and follow the most efficient, effective, profitable and competent tax practices.

For personalised tax guidance and solutions, contact us today!