What is Double Taxation Avoidance Agreement (DTAA)? (2024)

What is the Double Tax Avoidance Agreement?

Double Tax Avoidance Agreement (DTAA) is an agreement that has been signed between India and other countries. According to the agreement, an individual earning an income in another country while being a resident of another country does not have to pay two (double) taxes on the same income. For example, if you are an Indian resident and have an income earned in the USA because of the existence of your business in the USA, you would have to pay tax in the USA on the income generated there as well as in India where you file your tax returns. But, when the DTAA is in effect, you would have to pay taxes only in one country, not both. Alternatively, in case your income is chargeable to tax in both countries, then taxes paid in one country will be allowed as a credit in the other country as per the provisions of DTAAs. India has signed 85 DTAAs with various countries.

Objectives of DTAA Agreement

The objective of the Double Taxation Avoidance Agreement (DTAA) is to ensure that taxpayers do not pay tax twice on the same income in two different countries.

Key objectives of DTAA include:

1. Avoidance of Double Taxation: Ensuring that income is not taxed twice, DTAA helps in lowering the tax burden on international transactions.
2. Tax Relief: Providing mechanisms like tax credits, tax exemptions, or reduced tax rates to prevent double taxation.
3. Promoting International Trade and Investment: Encouraging cross-border economic activities by providing clear tax rules and reducing tax burdens.
4. Preventing Tax Evasion: DTAA is helpful in preventing tax evasion by facilitating the exchange of information between countries to prevent tax evasion and fraud.
5. Clarity and Certainty: Establishing clear guidelines for the taxation of income, thereby reducing disputes and ensuring smooth tax administration.

Example of DTAA

Abhinav, an Indian resident, earns INR 2500 through his investments in the USA. This INR 2500 would be taxed in India as foreign income and also in the USA as non-resident income. If the tax rates in India and USA are 30% each, an effective tax of 60% would be paid on the income, leaving Abhinav with only INR 1000 (INR 2500 – 60%) as the net income after taxes.

This dual taxation is a loss for the investor, and to address this issue, the Double Tax Avoidance Agreement came into the picture. The agreement was made to promote international trade. Under the provisions of the agreement, in the case of foreign income, taxation is done only once. Thus, when the individual knows that he would be taxed only once on the international income, he would be motivated to do business internationally and increase his scope of earning. This would, in turn, help countries attract investments from entrepreneurs. India can enjoy foreign investments as well as other countries can enjoy investments from Indian entrepreneurs. Thus, the agreement is mutually beneficial for all member countries in boosting their economies.

List of Countries Having Double Taxation Avoidance Agreement Treaty with India

How to determine if DTAA is applicable?

DTAA (Double Taxation Avoidance Agreement) applies when an individual or a company is liable to pay taxes in two countries on the same income. Here’s how you can determine if DTAA is applicable:

• Residency Status: Determine the residency status of the taxpayer as per the tax laws of each country involved. Most DTAA agreements define residency based on the number of days spent or other criteria.
• Nature of Income: Identify the specific type of income (e.g., salary, dividends, interest) that is subject to taxation in both countries.
• Taxation Rules in Each Country: Understand the tax rules and rates applicable in both countries to the income in question.
• Applicable DTAA: Consult the Double Taxation Avoidance Agreement between the two countries. Each DTAA specifies rules for determining which country has the primary right to tax specific types of income.
• Claiming Benefits: If DTAA benefits are available, ensure that proper procedures are followed to claim these benefits, such as submitting the necessary documents or forms to the tax authorities.
• Avoidance of Double Taxation: DTAA aims to prevent the same income from being taxed twice, providing relief through exemptions, credits, or reduced rates of tax.

If in doubt, seek advice from tax expert to determine the applicability of DTAA and ensure compliance. Connect Here.

What are the Benefits of DTAA in Income Tax?

Signing a DTAA agreement has many benefits both for the country and the taxpayer. Here are a few advantages of signing a DTAA -

• The main purpose of signing a DTAA is to establish the country as an attractive destination for business and investment.
• The relief can either be provided by exempting the foreign income from tax in the residence country or by providing a credit for the tax paid in the foreign country.
• DTAA reduces the chances of tax evasion by providing relief from tax.
• It provides concessions on tax rates
• Lower withholding tax allows taxpayers to pay lower TDS on their income from royalty, interest, or dividends.

What are the Documents Required for Claiming DTAA Benefits?

NRI’s can claim the benefits of DTAA by submitting the below-mentioned documents -

• Self Declaration form or Indemnity form
• Self-attested copy of PAN card
• Self-attested Visa
• Self-attested Xerox copy of Passport
• Tax residency certificate (TRC)
• A copy of PIO proof

Application of DTAA

DTAA can be applied either comprehensively or in a limited manner. Let's understand

• Comprehensive DTAA - Under comprehensive DTAA, tax benefits are provided on income, capital gains, and all sources of income
• Limited DTAA - Under this DTAA, tax reliefs are available in specific areas like income from shipping, income from air transport, income from estate, gift, or inheritance.

Incomes Exempted under DTAA

In the Indian context, NRIs would not have to pay double tax on the following sources of income earned in India based on the provisions of DTAA with the respective countries:

• Salary received
• Payment for services rendered in India
• Interest on fixed deposits in India
• Income from house property which is situated in India
• Interest earned on savings bank account maintained in India
• Capital gains earned when capital assets are transferred in India

How does the DTAA Work?

DTAA works on two principles

The source rule is when the income is taxed in the country of origin whether you are a resident of the country or not.

The resident rule specifies that the income would be taxed in the country where you reside, irrespective of the income's origin.

In India, the residence rule is followed. This means that your international income would be taxed in the country where you are a resident. If you are an Indian resident, your international income would be taxed in India. If, on the other hand, you are an NRI, your Indian income would be taxed in your resident country as well as in India. However, you can claim the benefit as per the provisions of the DTAA.

Tax Reliefs under DTAA as per the Indian Laws

Reliefs under DTAA can be categorized as unilateral or bilateral tax reliefs. Let's elaborate.

Bilateral Relief under Section 90 of the Income Tax Act, 1961

Bilateral relief is available in those countries with which India has entered into a DTAA treaty. Currently, India has a DTAA treaty with more than 80 countries where bilateral tax relief is available. Under bilateral tax relief, the tax benefit is granted in two ways:

1. Exemption method - Under this method, international income is either taxed in any one country, or a specific portion of the income is taxed in both countries.
2. Tax credit method - Under this method, income is taxed in both countries. Thereafter, you get a tax credit in your tax liability payable in your resident country for the tax already paid in the income source country. For instance, for your income earned in the USA, you paid a tax in the USA. Thereafter, when your tax liability is calculated in India on your total income, you get a deduction for the tax already paid in the USA.

The DTAA provisions would override the provisions of the Income Tax Act. It means that you can opt for the provision which is more beneficial to you.

Unilateral Relief Under Section 91 of the Income Tax Act 1961

You get unilateral tax relief if there is no DTAA treaty between India and the country in which the income originates. To avail unilateral relief, the following conditions would have to be fulfilled.

• You should be an Indian resident in the year the income is earned
• The income should be earned outside India
• The income should be taxable in a foreign country, and such tax should have been paid

Under the unilateral method, the income would be doubly taxed. and a deduction from the Indian income tax would be allowed. The rate of the deduction would be lower of the average tax in India or the average tax of the source country, whichever is lower. The average tax would be the tax paid divided by the total income multiplied by 100. If, both taxes are equal, the Indian tax rate would be allowed as a deduction.

How can NRIs Claim the Benefit of DTAA?

Non-resident Indians living in a DTAA country can avail of the DTAA tax benefits by submitting the following documents -

• Tax residency certificate (TRC) - TRC is a mandatory document if you want to avail of tax benefits under DTAA. You can get a TRC by approaching the government authorities of the residence country.
• Form 10F - Form 10F is another essential document to be filed by NRIs to avail of benefits under DTAA.
• PAN Number - You are also required to submit your PAN number in addition to the above-mentioned documents.

It is essential to understand what DTAA means and read the terms between the concerned countries to find the TDS rate. To know more about DTAA, connect with our experts.

How can one Apply for Double Taxation Avoidance Agreement?

There are a total of 3 ways in which you can claim DTAA benefits -

• Exemption - Exemption from tax can be claimed in any one country, i.e., residence or source country, subject to certain conditions.
• Tax Credit - A credit of the tax paid is claimed in the country where the taxpayer resides.
• Deduction - The country of residence allows the tax paid in a foreign country as a deduction.

For example, Mr.A is an Indian resident having income arising in the U.S. Now the income arising on a foreign land is taxable both in the origin country and the resident country. Under DTAA, the taxpayer, i.e., Mr.A can get relief from paying taxes in any one country. Generally, the taxpayer is either granted an exemption, deduction, or tax credit in the resident country.

What Services are Exempted Under DTAA?

The income earned from the following sources do not attract tax under DTAA -

• Services provided in India
• House property present in India
• Salary received in India
• Capital gains on transfer of assets in India
• Fixed deposits in India
• Savings bank account in India

For getting relief for income tax what are the pre-conditions? Is it given only if DTAA benefit is not available or if available and I am choosing not to use it?

Double taxation occurs when the same income is taxed in two different jurisdictions, which can be a significant burden for individuals and companies with foreign income sources. This issue is addressed by India through Double Taxation Avoidance Agreements (DTAAs) with 94 countries. These agreements provide clarity and allow taxpayers to claim a credit for taxes paid abroad against their Indian tax liability on the same income. This is outlined in Section 90 of the Income Tax Act, ensuring fair treatment for international income earners.

However, if India does not have a DTAA with a specific country, or if you choose not to use the DTAA benefits, Section 91 of the Income Tax Act offers a potential solution through unilateral relief. This relief is granted under certain conditions:

1. Income Earned: The income must have been earned in the previous financial year.
2. Tax Liability: The income must be subject to taxation in both India and the foreign country.
3. Comparable Tax System: The foreign country's tax system must be comparable to India's. And India should not have a DTAA with the specified country.
4. Tax Payment: The taxpayer must have paid taxes in the foreign country.
5. Relief Calculation: The amount of unilateral relief is the lesser of the Indian or foreign tax rate applied to the foreign income. This amount is then deducted from the taxpayer's overall Indian tax liability.

To claim either bilateral relief under a DTAA or unilateral relief under Section 91, taxpayers must file an Indian income tax return and provide a tax payment or deduction certificate from the relevant foreign tax authority.

Have you Been Paying Tax Twice on the Same Income? Consult a tax expert and never miss out on any potential tax deduction or exemption. Book tax Consultation Now!