Double Taxation Avoidance Agreement (DTAA) and India’s Policy

One of the most heavily guarded jurisdictions of a country is its fiscal jurisdiction. Therefore, even in the age of globalization, double taxation continues to be an obstacle to the development of international economic relations. Nations are often forced to discuss and settle the claims of other countries by means of double taxation avoidance agreements in order to bring down the barriers to international trade.

Double tax treaties are settlements between two countries, which include the elimination of international double taxation, promotion of exchange of goods, persons, services and investment of capital. Double taxation of the same factors would cause severe consequences for the future of international trade.

Countries of the world, therefore, aim at eliminating the prevalence of double taxation. Such agreements are called Double Taxation Avoidance Agreements (DTAA), also termed as Tax Treaties.

Objective of Double Taxation Avoidance Agreement (DTAA)

The objective of double taxation avoidance agreements is to provide a settlement between the tax claims of two governments, both legitimately interested in taxing a particular source of income.

Firstly, they help in avoiding the burden of international double taxation by laying down rules for the division of revenue between countries exempting certain incomes from tax in either country. Reducing the applicability rate of tax on certain incomes taxable in both countries and the tax treaties helps a tax-payer of a nation to know with greater certainty the potential limits of his tax liabilities in the other country.

The tax treaties ensure equal and fair treatment of tax-payers having different residential statuses, resolving differences in taxing the income and exchange of information and other details among treaty payers.

Applicability of DTAA Tax Treaty Benefits:

In order to get the benefit of the tax treaty, it is necessary to have access to it. For that purpose, a person must qualify in terms of the treaty as a person Resident of any of the contracting states, the beneficial owner of the income by way of dividends, interest or royalties for a lower rate of withholding tax.

Indian Tax Regime:

The Income Tax Act 1961 governs the taxation of income in India. According to section 5 of the ITA, Indian residents are taxable on their worldwide income and nonresidents are taxed only on income that has its source in India.

Section 6 defines who may be a tax resident and contains different residency criteria for companies, firms and individuals. The ITA favours source–based taxation as compared to the OECD model treaties or conventions entered into many developed countries that favour evidence taxation.

India’s Policy with Respect to DTAA (Double Taxation Avoidance Agreements)

Foreign trade with India should be relieved of Indian taxes considerably so as to promote its economic and industrial development. There should be coordination of Indian taxation with foreign tax legislation for Indian as well as foreign companies trading with India.

The agreements are intended to permit the Indian authorities to cooperate with the foreign tax administration. Tax treaties are a good compromise between taxation at sources and taxation in the country of residence.

India has comprehensive double taxation avoidance agreements with 79 countries. This means that there are agreed rates of tax and jurisdiction 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 which provide specific relief to tax-payers to save them from double taxation. Section 90 is for tax-payers 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 taxes to a country with which India has not signed a DTAA. Thus India gives relief to both kinds of tax-payers.

A large number of foreign institutional investors who trade on the Indian stock markets operate from Mauritius. According to the tax treaty between India and Mauritius, capital gains arising from the sale of shares are taxable in the country of residence whose shares have been sold.

Therefore, a company resident in Mauritius selling shares of an Indian company will not pay tax in India. India has stepped into a wide network of tax treaties with various countries all over the world to facilitate the free flow of capital into and from India.

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