In India, as well outside India, generally, the taxation arises on two basis. One is on resident basis and second on source based. Hence, in case of a person, who is tax resident of other country and earning income from India, or vice versa case, taxability arises in two countries. This situation leads to double taxation of same income in two countries. This situation is very commonly faced by NRIs/PIOs, as they are tax resident of other country and earning income from various sources/investment in India.
To avoid such situation, Countries do a bilateral agreement, named as Double Tax Avoidance Agreements (DTAA). The basic objective of this agreement is to avoid taxation of same income in both the countries. In India, salient features of DTAA are as under.
- DTAA Overrides Income Tax Act 1961: Provisions of DTAA have been given overriding powers over the local Income Tax Act vide section 90(2) of the Indian Income Tax Act.
- Applying DTAA Is Optional: It is assessee’s decision whether to apply DTAA or seek the course of Domestic Tax. Hence, if domestic tax provisions are more beneficial then NRIs can choose to take benefit of domestic tax provisions e.g. basic exemption slabs, exempted incomes (dividend, long term capital gains of shares/mutual funds etc).
- Lower Rate of TDS: For the purposes of deducting TDS, payer can always choose to deduct TDS at the rates provided in DTAA e.g. in case of Interest payment generally DTAA provides tax rates @15%. Domestic law TDS rate shall be 30%. Hence, applying DTAA rate is beneficial. Similarly, in case of Royalty & Technical Fee payment.
- Taxation in One Country: It is generally mentioned in various articles of a DTAA that where the specified income shall be taxable e.g. in case of immovable property generally DTAA provide to tax in the country where immovable property is situated i.e. source based taxation. Hence, taxation happens only in one country.
- Tax Credit: Where tax is paid by the assessee in one country (i.e. source country) and thereafter, again taxation arises in resident based country, DTAA provide for tax credit for taxes paid in source country.
- NRI Should Apply DTAA For Interest Income: NRIs must seek the course of applying DTAA wrt Interest Income from NRO account, Government securities, Loans, Fixed Deposits with Companies and dividends etc. In case of Interest income, generally, the DTAA tax rates are much lower than the Indian Income Tax rates.
- India Vs DTAA: India has comprehensive DTAA with approx. 90 countries. Hence, still there are lots of countries with whom India does not have a DTAA e.g. Hongkong. In such cases, a relief under the provisions of section 91 (of Income Tax Act) can be availed by the NRIs, which is a limited benefit.
- DTAA – India Vs Mauritius: DTAA between India and Mauritius is worldwide very popular. According to this DTAA, 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 resident in Mauritius selling shares of an Indian company gets exempted from tax in India. Further, since there is no capital gains tax in Mauritius, the gain escapes tax altogether. This treaty is based for most of Foreign Investments in India through Mauritius route. Similar benefits are also available in some other treaties e.g. India-Singapore, India-Cyprus etc.