Understanding DTAA

The Double Taxation Avoidance Agreements (DTAA) is essentially a bilateral agreement between two countries. The main goal of this treaty is to foster the exchange of goods, services, and capital investment by eliminating the issue of international double taxation.

This treaty implies that the tax rates and jurisdiction on specific types of income arising in one country for a tax resident of another country have been mutually agreed upon. This agreement protects taxpayers in these 88 countries from being taxed twice for the same income.

Double taxation is a concern that arises with the taxation of income that crosses international borders. The DTAA can cover all types of income or target specific types of income, depending on the types of businesses/holdings of citizens of one country in another. The following categories are typically covered under the Double Taxation Avoidance Agreements (DTAA):

• services
• salary
• property
• capital gains
• savings/fixed deposit accounts

As an IAS aspirant, it is crucial to have a thorough understanding of the various agreements or treaties signed between India and other countries, as they form an integral part of the UPSC Syllabus .

Advantages of Double Taxation Avoidance Agreements

The Income Tax Act 1961 under Sections 90 and 91 provides specific relief to taxpayers to prevent double taxation. Section 90 deals with provisions involving taxpayers who have paid tax to a country with which India has a DTAA. Section 91 is for those countries with which India does not have a DTAA. In effect, India provides relief to both types of taxpayers.

Some of the key benefits of Double Taxation Avoidance Agreements (DTAA) include:

• The countries under the DTAA are provided relief from double taxation. Relief on double taxation is provided by the exemption of incomes earned abroad from tax in the resident country or by providing credit to the extent taxes that have been already been paid abroad.
• In some cases, the DTAA also provide concessional rates of tax.
• DTAA can become an incentive for even legitimate investors to route investments through low-tax regimes to sidestep taxation. This leads to a loss of tax revenue for the country.
• DTAA also provides tax certainty to the various investors and businesses of both the countries through the clear allocation of taxing rights between the contracting states by Agreement.

India and DTAA

India has signed the Double Taxation Avoidance Agreements or DTAA with 88 countries. Foreign companies that are resident in the countries that India has a DTAA with, can claim more beneficial provisions and rates between the IT Act and the DTAA. Recently, the Government of the Republic of India and the Government of the People’s Republic of China had signed the Double Taxation Avoidance Agreement (DTAA) on 26/11/2018.  This agreement was signed for providing relief on double taxation along with preventing fiscal evasion concerning taxes on income.

To learn more about India-China relations , refer to the linked page.

Revised DTAA (India-Kenya)

The Double Taxation Avoidance Agreements (DTAA) between India and Kenya, initially signed in 1985, was renegotiated and revised by both countries.  The revised DTAA was later signed on 11th July 2016 between India and Kenya. Some of the major highlights of the revised DTAA are mentioned below:

Some of the key features of the revised DTAA are highlighted as under:

1. The revised DTAA provides for a reduction in the withholding tax rates. The revised tax rates range from 15% to 10% on dividends, 20% to 10% for the royalties, and 17.5% to 10% for management and professional services fees.
2. The revised DTAA provides for a new Article on Limitation of Benefits to allow treaty benefits to bonafide residents of both countries, to combat treaty abuse by third-country residents, and to allow the application of domestic law to prevent tax avoidance or evasion.
3. The revised treaty also provides a new Article on Assistance in Collection of Taxes which will assist in the collection of tax revenue claims between both the countries.

Documents required to avail the benefits under DTAA

To benefit from the provisions of the DTAA, non-resident Indian individuals will have to provide the following documents in a timely manner to the relevant tax deductor.

• Self-declaration cum indemnity format
• Self-attested PAN card copy
• Self-attested visa and passport copy
• PIO proof copy (if applicable)
• Tax Residency Certificate (TRC)

As per the Finance Act 2013, an individual cannot claim any benefit of relief under the Double Taxation Avoidance Agreement unless they provide a Tax Residency Certificate to the deductor.

To receive a Tax Residency Certificate, an application has to be made in Form 10FA to the income tax authorities. Once the application is successfully processed, the certificate will be issued in Form 10FB.

The Double Taxation Avoidance Agreements (DTAA) is an essential topic for the Civil Service Exam . It is included under the GS-II section of the UPSC syllabus.

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