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What is Double Taxation Avoidance Agreement (DTAA)?

By Roshni Agarwal
|

Double Taxation Avoidance Agreement (DTAA) also referred as Tax Treaty is a bilateral economic agreement between two nations that aims to avoid or eliminate double taxation of the same income in two countries.

Example citing the working of DTAA:

An NRI individual living in X country maintains an NRO account with a bank based in India. The interest income on the balance amount in the NRO account is deemed as income that originates in India and hence is taxable in India.

What is Double Taxation Avoidance Agreement (DTAA)?
In case, India and X nation are contracted under the DTAA, this income will have tax implications in accordance with the rate specified in the agreement. Otherwise, the interest income will attract tax @ 30.90 % i.e. the current withholding tax.
 

Also, NRI is entitled to avail the benefits under the provisions of DTAA between India and his country of residence with respect to interest income on government securities, company fixed deposits, dividend and loans.

Entitlement to benefits under DTAA requires submission of certain documents:

To be entitled to the benefits laid down under the provisions of the DTAA, NRI individual needs to submit below listed documents in a timely manner to the concerned deductor.

  • Self-declaration or indemnity format. The format for the same is available on the website of the bank.
  • Self-attested PAN card copy
  • Self-attested visa and passport copy
  • PIO proof copy in case renewal of the passport is made during the course of the current financial year
  • Tax Residency Certificate (TRC): TRC is a crucial document that is to be submitted with the deductor for availing the benefits of the DTAA agreement. The same can be obtained from the government or tax authorities of the foreign nation where the NRI is residing.

List of countries with whom India has DTAA arrangements

Scenario of DTAA in India:

As of now, India has DTAA with 84 nations, including Armenia, Bangladesh, Finland, Ireland,Japan, Kazakhstan, Greece, Italy and several others. Further, India is constantly gearing to establish DTAA with other nations as such agreements work towards promoting trade and investments among contracted nations.

 

Need for Understanding DTAA

For a country to prosper, its economy has to grow. Apart from the development in the domestic country, it will require foreign investments to flourish. DTAA's provide clarity on how the cross - border transactions will be taxed and this will encourage foreign investors to benefit from understanding the rules and regulations.

For Example: If an individual of Indian origin who is working in a company in India has been posted abroad for a brief period of time then the salary and other emoluments which he/she earns during their stay abroad might be taxed in both the countries. So it is better to understand the rules and regulations of the DTAA to claim the benefits of taxation at the time of filing Income Tax Returns.

Government working on DTAA to avoid tax evasion

Recently, there were reports that the DTAA agreement with one of the leading countries through which a lot of inflows happens was being re-worked. The government has been worried that individuals are using the Double Taxation Avoidance Agreement to evade paying tax.

In fact, the available of capital gains tax treaty through the DTAA many feel ay have been exploited. The government is now loooking at changing some provisions of the DTAA.

Similarly, another tax haven from which a lot of inflows happens could be examined and re-worked. The list of countries with whom India has these DTAA agreements could be re-visited from time to time.

Recently, the government of India signed a protocol ammending the Double Taxation Avoidance Agreement with Mauritius.

It would now allow India the ability to tax Mauritius residents for capital gains sale of share arising in India. For long there has been an argument that tax treaties from tax havens have been exploited.

In India, there have been reports of round tripping, where money first leaves the country and than flows back to India into the stock markets through tax havens.

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