DTAA – Double Taxation Avoidance Agreement: Definition, Types, and Benefits

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DTAA – Double Taxation Avoidance Agreement: Definition, Types, and Benefits

For Non-Resident Indians (NRIs) employed in foreign countries, the Double Taxation Avoidance Agreement (DTAA) serves as a vital tool to prevent the occurrence of double taxation on income earned both in their country of residence and in India. With 85 active agreements in place, India endeavors to ensure that taxpayers in these countries are not burdened with the obligation of paying taxes twice on the same income. The primary objective of DTAA is to stimulate and facilitate economic trade and investment between two nations by circumventing instances of double taxation. To access the DTAA agreements entered into by India with various countries, individuals can refer to the income tax department’s website via the following link: Notification of Government.

What is DTAA?

DTAA, or Double Taxation Avoidance Agreement, stands as a pact between two or more nations aimed at preventing the imposition of taxes on the same income twice. This agreement comes into play when an individual resides in one country but earns income in another. Essentially, DTAA outlines the tax rates and jurisdictions applicable to income derived from each country involved.

Consider the case of Mr. Arjun, an Indian national residing in the UK. Despite his investments in India generating returns, he may face the prospect of being taxed on this income in both India and the UK. However, thanks to DTAA, Mr. Arjun is spared from double taxation. This agreement ensures that he will not be subjected to taxation for the same income in both countries, thereby offering him relief from potentially burdensome tax liabilities.

Types of DTAA

Relief from Double Taxation can be granted through bilateral treaties or unilateral relief methods. Bilateral Treaties involve agreements between two countries, where relief is determined based on mutual consent:

1. Exemption method: Under this approach, income is taxed in only one country, typically the country of residence.
2. Tax credit: Income is taxed in both countries, but relief is granted in the country where the taxpayer is a resident, usually through tax credits.

Alternatively, Unilateral Relief is provided by the taxpayer’s home country when there’s no mutual agreement between nations.

DTAA can be Comprehensive, covering various types of income, or Limited, focusing on specific types of incomes.

Advantages of DTAA include making a country more appealing for investment by offering relief on dual taxation, reducing tax evasion possibilities, and providing concessions on tax rates, including lower withholding tax.

Implementation of DTAA can occur either by exempting income earned abroad entirely or by providing a credit for tax paid in the other country.

In Mr. Arjun’s case, if the DTAA states that the UK exempts his income earned from investments in India, he will only pay taxes in India. However, if both India and the UK tax the income, Mr. Arjun will receive a tax credit for taxes paid in the UK, reducing his tax liability in India.

Nations sign DTAA to provide relief to taxpayers and stimulate investments.

To claim DTAA benefits, NRIs in DTAA countries must submit the following documents annually within the specified deadlines:

1. Tax Residency Certificate (TRC): Obtain TRC from tax/government authorities of the current residence country, certified through Form 10F.
2. Form 10F: Submit Form 10F to avail DTAA benefits.
3. PAN Number: Provide PAN along with other documents to claim tax benefits.

How to apply for DTAA?

Applying DTAA entails a structured approach, incorporating various provisions:

1. Scope Evaluation: Initially, ascertain if the matter falls within the treaty’s scope.
2. Tax Applicability Verification: Confirm if the tax under consideration aligns with those outlined in Article 2 or bears substantial similarity to them.
3. Treaty Validity Check: Ensure that the treaty is effective for the relevant taxable period.

These sequential steps help in determining the eligibility and applicability of DTAA provisions, ensuring a systematic approach to tax relief.

How is Double Taxation Avoidance Agreement relief calculated?

When DTAA is applicable, taxpayers can claim relief under section 90. Here’s how to compute Double Taxation relief:

1. Calculate Global Income: Sum up Indian and Foreign incomes.
2. Determine Tax on Global Income: Apply slab rates to compute tax.
3. Average Tax Rate: Find the average tax rate (Global income divided by tax amount).
4. Tax on Foreign Income: Multiply Foreign income by the average tax rate.
5. Foreign Tax Paid: Determine tax paid in the Foreign country.
6. Relief Calculation: Choose the lower amount between Foreign tax paid and Tax on Foreign income.

In the absence of DTAA, relief can be claimed under section 91. Here’s how:

1. Calculate Indian Tax: Compute tax payable in India.
2. Compare Tax Rates: Determine the lower tax rate between India and the Foreign country.
3. Tax Adjustment: Multiply the lower tax rate by the doubly taxed income.
4. Relief: The relief amount is as computed in the previous step.

India has signed DTAA with numerous countries, including major ones where Indians reside. Some notable countries on this list include: [List of countries].

Country	DTAA TDS rate
United States of America	15%
United Kingdom	15%
Canada	15%
Australia	15%
Germany	10%
South Africa	10%
New Zealand	10%
Singapore	15%
Mauritius	7.5% to 10%
Malaysia	10%
UAE	12.5%
Qatar	10%
Oman	10%
Thailand	25%
Sri Lanka	10%
Russia	10%
Kenya	10%

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Official Income Tax Return filing website: https://incometaxindia.gov.in/