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Guide to Double Taxation Treaty in India


Guide to Double Taxation Treaty in India

Double taxation is levying of tax by two countries on the same income of an assessee. Double taxation is usually an issue for NRI’s and Foreign Nationals doing business in India. Therefore, the double tax liability of an assessee is mitigated by countries through tax treaties between countries. India has Double Taxation Avoidance Agreements (DTAA) with 84 countries. In this article, we look at the Double Taxation Treaty and Double Taxation Avoidance Agreements in detail.

Double Taxation

NRIs and Foreign Nationals may make again in India and also another foreign country that they belong too. Such persons may find that they are required by domestic laws to pay tax locally on any gain made in any country and also pay tax again in the foreign country, in which the gain was made. Since this creates an unfair system and stifles business investment, many nations have implemented double taxation agreements with each other.

By establishing double taxation avoidance agreements, by paying tax in the country of residence, a person may be exempt from paying tax in the country in which it arises. In some cases, a country in which the gain arises may deduct tax at source (also known as withholding tax) and the taxpayer would receive the foreign tax credit in the country of residence to reflect that tax has already been paid. The methodology for double taxation avoidance varies between country to country. Hence, it is best to refer to the Double Taxation Avoidance Agreement between the concerned countries to know the exact procedures.

India Double Taxation Treaty

India has Double Taxation Avoidance Agreements (DTAA) with 88 countries out of which 86 are in force. For transactions involving persons having interest between countries with which India has a DTAA, there are agreed rates of tax and jurisdiction on specified types of income. Therefore, through Section 90, tax relief is provided for those person residents of a country with which India has signed DTAA.

In case the country in which the person is a resident has not signed a DTAA agreement with India, then Section 91 of the Income Tax Act is used to provide relief from double taxation. Thus, India provides double taxation avoidance relief for both kinds of taxpayers.

Areas covered in the Double Taxation Avoidance Agreements

The following are some of the main areas covered in the DTAAs between countries:

  • Methodology for the avoidance of double taxation of income in India or Foreign Country.
  • Rate of withholding tax, the procedure for a tax deduction and providing of tax credits.
  • Procedure for recovery of income tax under the Indian Income Tax Act and under the corresponding law in force in a foreign country.
  • Methodology for exchange of information between the countries to prevent the evasion or avoidance of income tax in India and the foreign country.
  • Procedure for investigation of cases of tax evasion or avoidance.

Tax Residency Certificate

The Government of India has made it mandatory for assessee’s to obtain Tax Residency Certificate (TRC) from the country of residence to avail the benefits of the Double Taxation Treaty in India.

DTAA Agreement with Mauritius

India has a comprehensive DTAA agreement with Mauritius wherein the capital gains arising from the sale of shares are taxable in the country of residence of the shareholder and not in the country of residence of the company whose shares have been sold. Therefore, a Company incorporated in Mauritius selling shares of an Indian Company will not pay capital gains tax in India. Further, since there is no capital gains tax in Mauritius, the entire gain on capital gains arising from the sale of shares will not be taxed. Hence, this unique feature of the DTAA agreement between India and Mauritius is used by many Foreign Institutional Investors to trade in the Indian stock markets and avoid capital gains tax in India and Mauritius.

India has DTAA agreements that are similar to the India – Mauritius DTAA Agreement with Singapore and Cypriot. Hence, many Indian Companies and Foreign Investors invest through these foreign companies in foreign countries into India.

List of Countries having Double Taxation Treaty with India

The following are the list of countries having the Double Taxation Treaty with India:

  1. Armenia
  2. Australia
  3. Austria
  4. Bangladesh
  5. Belarus
  6. Belgium
  7. Botswana
  8. Brazil
  9. Bulgaria
  10. Canada
  11. China
  12. Cyprus
  13. Czech Republic
  14. Denmark
  15. Egypt
  16. Estonia
  17. Ethiopia
  18. Finland
  19. France
  20. Georgia
  21. Germany
  22. Greece
  23. Hashemite Kingdom of Jordan
  24. Hungary
  25. Iceland
  26. Indonesia
  27. Ireland
  28. Israel
  29. Italy
  30. Japan
  31. Kazakastan
  32. Kenya
  33. Korea
  34. Kuwait
  35. Kyrgyz Republic
  36. Libya
  37. Lithuania
  38. Luxembourg
  39. Malaysia
  40. Malta
  41. Mauritius
  42. Mongolia
  43. Montenegro
  44. Morocco
  45. Mozambique
  46. Myanmar
  47. Namibia
  48. Nepal
  49. Netherlands
  50. New Zealand
  51. Norway
  52. Oman
  53. Philippines
  54. Poland
  55. Portuguese Republic
  56. Qatar
  57. Romania
  58. Russia
  59. Saudi Arabia
  60. Serbia
  61. Singapore
  62. Slovenia
  63. South Africa
  64. Spain
  65. Sri Lanka
  66. Sudan
  67. Sweden
  68. Swiss Confederation
  69. Syrian Arab Republic
  70. Tajikistan
  71. Tanzania
  72. Thailand
  73. Trinidad and Tobago
  74. Turkey
  75. Turkemistan
  76. UAE
  77. UAR (Egypt)
  78. UGANDA
  79. United Kingdom
  80. Ukraine
  81. United Mexican States
  82. United States of America
  83. Uzbekistan
  84. Vietnam
  85. Zambia

Click here to access all the DTAAs in detail. For more information, get in touch with an IndiaFilings Business Advisor.