DOUBLE TAXATION AVOIDANCE AGREEMENT
Double Taxation Avoidance Agreement
The Double Taxation Avoidance Agreement (DTAA) is a bilateral treaty established between two countries with the aim of promoting trade, investment, and economic cooperation by eliminating the issue of double taxation. Double taxation arises when an individual or company is required to pay tax on the same income in two different countries. This situation often leads to burdensome financial implications that can hinder the flow of capital, services, and people between countries.
DTAA addresses this issue by determining which country has the right to tax specific income, thereby ensuring that taxpayers do not face the restrictive burden of double taxation. It helps simplify the process for international businesses and individuals, offering more clarity and efficiency in tax matters.
The need for such an agreement arises from the fact that countries may have different rules regarding income taxation, especially in terms of residency status, income recognition, and accrual basis. As a result, a taxpayer may be subject to taxes in both countries, leading to double taxation. DTAAs aim to resolve these conflicts and provide relief to taxpayers who might otherwise face the challenge of paying taxes on the same income in multiple jurisdictions.
Reliefs Against Double Taxation
In India, relief from double taxation is provided under Sections 90 and 91 of the Income Tax Act. The relief can be obtained in two ways:
- Unilateral Relief: Under Section 91, if there is no DTAA between India and the foreign country, an Indian taxpayer can still claim relief. The following conditions apply:
The taxpayer must be a resident of India during the previous financial year.
The income must be taxable in both India and the foreign country.
Tax must have been paid in the foreign country under its statutory laws. - Bilateral Relief: Under Section 90, India enters into DTAAs with other countries to provide bilateral relief from double taxation. These treaties are based on mutually agreed-upon terms that specify how income should be taxed to prevent double taxation.
Types of DTAAs
- Comprehensive DTAA: These agreements cover a wide range of income types and often include provisions for wealth tax, gift tax, and surtax. Some of the countries with which India has signed comprehensive DTAAs include:
Romania
Russia
Saudi Arabia
Singapore
South Africa
Spain
Sri Lanka
United Kingdom (UK)
United States (USA)
UAE
Ukraine
Vietnam - Limited DTAA: These agreements are restricted to specific types of income, such as income derived from airlines or merchant shipping. India has signed limited DTAAs with countries including:
Afghanistan
Bulgaria
Iran
Kuwait
Oman
Pakistan
Saudi Arabia
UAE
DTAA and its Role in International Business
When an Indian resident earns income or profits in another country, they may face the risk of being taxed both in India and in the foreign country. To protect Indian taxpayers from the burden of double taxation, the DTAA ensures that India’s trade, services, and movement of capital are not negatively impacted. Under the DTAA, India provides relief through tax credits or exemptions to ensure that taxpayers are not unfairly taxed twice.
Claiming DTAA Benefits for International Business
For non-residents, the taxability of income is determined under both the Income Tax Act, 1961, and the provisions of the DTAA. The non-resident taxpayer has the option to choose the more beneficial option between the two, based on the terms of the DTAA.
With the global economy becoming more interconnected, international income is often subject to tax in both India and the foreign country. To prevent the risk of double taxation, DTAA ensures that taxpayers are not taxed excessively and provides mechanisms for claiming foreign tax credits.
NGVR and Company: Your DTAA Consultant
At NGVR and Company, we specialize in providing comprehensive DTAA consulting services. Our expert team guides businesses and individuals in understanding and leveraging the benefits of Double Taxation Avoidance Agreements. We offer end-to-end solutions, helping clients analyze the most efficient tax strategies and ensuring compliance with international tax laws. Whether you are dealing with cross-border income or managing global business operations, NGVR and Company offers expert advice and support to help you navigate the complexities of DTAA and double taxation.