What is Double Tax Avoidance Agreement?
Double Taxation Avoidance Agreements or DTAA is a treaty signed between India and another country, through which a taxpayer can avoid the double tax on their income in the country in which it is earned as well as its taxability in the home country. Such treaties promotes the exchange of goods, services, and investment of capital between the two countries.
At present, India has double tax avoidance treaties with more than 80 countries around the world.
Background of DTAA
The primary idea behind DTAA agreements with various countries is to minimize the opportunity for tax evasion for tax payers in either or both of the countries between which the bilateral/multilateral DTAA agreement have been signed.
Lower withholding tax is a plus for taxpayers as they can pay lower TDS on their interest, royalty or dividend incomes in India, while some agreements provide for tax credits in the source or country of operations so that taxpayers don’t pay the same tax twice. In some cases, such as agreements with Mauritius, Cyprus, Singapore, Egypt etc. capital gains tax is exempted which can be a boon to taxpayers as they can use the DTAA agreement to minimize taxes.
Benefits of DTAA
Entering into the DTAA offer various benefits to the business organization which include among other thing the following benefits:
- Prevent Paying Double Tax on the same income;
- Lower Withholding Tax (Tax Deduction at Source or TDS);
- Exemption from taxes;
- Tax credits.
- 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.
Methods of Claiming DTAA benefits?
There are basically 3 methods through which the benefits of the DTAA can be claimed: –
- Tax Deduction: under the tax deduction method the Taxpayer can claim the deduction of the taxes paid to foreign government in the tax paid in the country of residence.
- Tax Exemption: Under this method, tax payer can claim the relief in Tax paid in any one of the two countries.
- Tax credit: under this method, Tax relief can be claimed by way of credit on the tax paid outside India in the country of residence.
Documentation and work to claim DTAA advantage
There are certain procedure that are to be followed in order to avail the double tax avoidance agreement. An individual, in order to get qualified for availing the advantage of the DTAA’s provisions and benefits is required to submit the tax residence certificate to the deductor and the following paperwork:-
These documents are listed below:
- Indemnity/Self-Declaration Form
- Tax Residency Certificate (In order to apply for a Tax Residency Certificate under sections 90A and 90 of the Income Tax Act, you must submit Form 10FA. The certificate will be issued under Form 10FB following the application’s successful verification and processing.)
- PAN Card Copy
- Self-Attested Visa
- Passport Xerox
- PIO Proof Copy
Procedure of Applying the DTAA
There are certain steps to be followed in order to apply the DTAA provisions:-
- Tax Liability as per Income Tax Act: Find out the type of income on which DTAA applies and its tax liability under the Income Tax Act.
- Tax liability under the DTAA: If the income falls under specific articles of DTAA, then the income will be taxed as per those articles.
- Finalize the tax liability: Using section 90(2), decide which is more advantageous between the IT Act and DTAA (Treaty Override).
How to Avoid Double Taxation
The Double Tax Avoidance Agreement (DTAA) helps you avoid paying taxes in both your home country and the country you reside. The tax treaty is signed by India and another country to avoid double taxation. Some DTAAs are comprehensive agreements comprising all income types, while others are specific agreements focusing on a few income types.
Many people are under the impression that by using a DTAA, they can avoid paying taxes altogether. However, that is not true. The Data allows for a rebate, not a total deduction, which means when NRIs earn income in India, they can reduce their tax implications. HDFC Bank provides an online DTAA Annexure you can use to avail of tax rate deductions.
A brief summary of the DTAA / Tax Treaty
- A tax treaty is an bilateral agreement made by two countries through which the countries strive to resolve issues involving double taxation of the income of the same person in the country in which it is earned and the country of which such person is resident
- When an individual or business invests in a foreign country, the issue of which country should tax the investor’s earnings may arise.
- Both countries may voluntarily enter into a tax treaty to agree on which country should tax the investment income to prevent the same income from getting taxed twice.
- There are certain countries which are considered as tax heaven such as Mauritius and these countries do not enter into any kind of tax treaty.