Consultancy on Double Taxation Avoidance Treaty
The Double Tax Avoidance Agreements (DTAA) is essentially bilateral agreements entered into between two countries, in our case, between India and another foreign country. 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 advantages of DTAA are as under:
- Lower Withholding Taxes (Tax Deduction at Source)
- Complete Exemption of Income from Taxes
- Underlying Tax Credits
- Tax Sparing Credits
Can you imagine what would happen if you were a resident of India, but work for half of the year in Australia, and get taxed in India as well as Australia? It'd be bad. No one would do it. Even the big MNCs would stay away from such disasters.
Keeping this in mind, under section 90 of the Income Tax Act 1961, the central government has entered into DTAA with many countries. What does this do? Well this agreement aims to put forward equitable basis and means of allocating tax liability in case of an individual who has earned income in a country different from his/her residence. India has an exhaustive agreement with 79 countries* and not stopping there, India also aims to give tax neutrality to residents and non-residents who have income arising from countries not included in the DTAA.
*Armenia, Australia, Austria, Bangladesh, Belarus, Belgium, Botswana, Brazil, Bulgaria, Canada, China, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Indonesia, Ireland, Israel, Italy, Japan, Kazakhstan, Kenya, Korea, Kuwait, Kyrgyz Republic, Libya, Luxembourg, Malaysia, Malta, Mauritius, Mongolia, Montenegro, Morocco, Myanmar, Namibia, Nepal, Netherlands, New Zealand, Norway, Oman, Philippines, Poland, Portuguese Republic, Qatar, Romania, Russia Federation, Saudi Arabia, Serbia, Singapore, Slovenia, South Africa, Spain, Sri Lanka, Sudan, Sweden, Swiss Confederation, Syria, Tajikistan, Tanzania , Thailand , Trinidad and Tobago, Turkey, Turkmenistan, Uganda, Ukraine, United Arab Emirates, United Arab Republic (Egypt), United Kingdom, United States of America, Uzbekistan, Vietnam, Zambia
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 are more 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 2012-2013,
Withholding Tax Rate (TDS) under the Indian Income Tax for Interest Income - 33.99% whereas,
Rate of Tax prescribed in the DTAA with the country where Non Resident resides e.g. Singapore - 15%
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.