Double Taxation Avoidance Agreement: Meaning and Conceptual Understanding

By | December 14, 2021
Double Taxation Avoidance Agreement_ Meaning and Conceptual Understanding

Last Updated on by Admin LB

This article titled ‘Double Taxation Avoidance Agreement: Meaning and Conceptual Understanding.’ is written by Eshanee Bhattacharya and discusses the double taxation avoidance agreement.

I. Meaning and Conceptual Understanding

The Double Taxation Avoidance Agreement (DTAA) is a tax treaty signed by two or more nations to assist taxpayers in avoiding double taxation on the same income. When a person is a citizen of one country but makes money in another, a DTAA becomes relevant.

The goal of a Double Taxation Avoidance Agreement is to make a country appear more appealing to investors by offering exemption from double taxation. This type of relief is offered by exempting income generated in a foreign country from taxation in the resident country or by providing credit for taxes paid elsewhere.

To take advantage of the DTAA’s provisions, an NRI must deliver the following documentation to the appropriate authority in a timely manner.

There are numerous advantages to the DTAA for taxpayers. The main advantage is that you won’t have to pay multiple taxes on the same income. Other than that,

  1. Reduced Withholding Taxes (Tax Deduction at Source or TDS)
  2. Credits for taxes
  3. exemption from paying taxes

The main goal of DTAA agreements with various nations is to reduce the possibilities for tax evasion for taxpayers in either or both of the countries included in the bilateral or multilateral DTAA agreement.

Taxpayers benefit from lower withholding tax since they pay less TDS on interest, royalties, and dividend income in India, and certain agreements provide for tax credits in the source or nation of operations so that taxpayers do not pay the same tax twice

II. 4 Models of DTAA

  1. OECD Model Tax Convention –

Based on the Residence principle.

  1. UN Model Double Taxation Convention –

Based on the combination of Residence and Source. The principle with key emphasis on the latter.

  1. US Model Income Tax Convention –Followed for entering into DTAAs with the US
  2. Andean Community Income and Capital Tax Convention –

Adopted by Member State, namely, Bolivia, Chile, Ecuador, Columbia, Peru and Venezuela.

III. DTAA’s Types

There are two types of DTAA.

1. Comprehensive

Comprehensive DTAAs cover practically all forms of income that any model convention covers. Often, a treaty will cover wealth tax, gift tax, and surtax. Also, etc.

2. Restricted or Limited DTAA

Limited DTAAs are those that only apply to certain forms of revenue, such as the DTAA between India and Pakistan, which only applies to shipping and aircraft profits.

IV. Legal Provisions

1. Section 90A of the Income Tax Act, 1961

When the DTAA is signed between India and a specific foreign association, this follows. In such instances, tax relief under section 90A of the Income Tax Act of 1961 may be obtained. If the organisation does not have an agreement with your country, such persons must get a Tax Residence Certificate from their home country’s government.

2. Section 91 provides tax relief

This occurs when the country in which you work and India do not have a bilateral trade agreement (DTAA) in place. In such instances, u/s 91 tax relief requests must be filed.

V. The conflict between DTAA and Indian Income Tax Act, 1960

To avoid double taxation, even the tax at source must be deducted at the point of sale at the rate at which the money in question will be taxed in the end as a result, even TDS requirements in Chapter XVII-B of the Act are subject to the provisions of the Act.

In other words, the DTAA requirements will take precedence over the TDS provisions. Taxpayers gain from lesser withholding tax since they pay less TDS on interest, royalties, and dividend income in India, and certain agreements provide for tax credits at the source or in the country of operations, ensuring that taxpayers do not pay the same tax twice.

It should also be noted that section 90(2) of the Act recognises what is known as a treaty override by making the benefit of the agreement available to the assessee when it is more favourable than the domestic legislation.[1]

The Supreme Court, several High Courts, and various Benches of the Income-Tax Appellate Tribunal (ITAT) have all issued significant legal precedents in support of the aforementioned perspective.

VI. P.V.A.L.K.Chettiar v. CIT [2004] 267 ITR 654 (SC)

In this instance, it was decided, among other things, that in the event of a dispute between the DTAA’s provisions and the Act’s, the DTAA’s provisions would prevail over the Act.

Section 90(2) of the Act provides for this. Section 90(2) specifies that where the Central Intelligence Agency (CIA) is involved, the Central Intelligence Agency (CIA). The Indian government has reached an agreement with the government of any country other than India.

The provisions of the Act shall apply to whom such an agreement applies to the extent they are applicable.

VII. Union of India v. Azadi Bachao Andolan 263 ITR 706 (SC)

In this case, it was held, among other things, that section 90 is meant to enable and empower the Central Government to make Notifications for the implementation of the DTAA’s terms. The provisions of such DTAAs would apply even if they were in conflict with the Income-Tax Act of 1961 in the instances to which they apply.

It was also held that once the Central Government has issued the required Notification under section 90, the provisions of section 90(2) come into effect, and an assessee who is covered by the DTAA’s provisions is entitled to seek the benefits therein, even if the DTAA’s provisions conflict with those of the Act.

VIII. Documents mandatory for availing DTAA[2]

  1. Format for self-declaration and indemnity
  2. a copy of your PAN card that has been self-attested
  3. a copy of your passport and a self-attested visa
  4. Proof copy from the PIO (if applicable)
  5. Certificate of Tax Residence (TRC)

According to the Finance Act of 2013, unless a Tax Residency Certificate is provided to the authority, an individual will not be eligible to claim any benefit of relief under the Double Taxation Avoidance Agreement.

An application for a Tax Residency Certificate must be submitted to the income tax authorities in Form 10FA (Application for Certificate of Residence for the Purposes of an Agreement Under Section 90 and 90A of the Income-tax Act, 1961).

The certificate will be issued in Form 10FB once the application has been satisfactorily processed.


References

[1] S.K Tyagi, Provisions of DTAA override the provisions of I.T.Act, 1961, including TDS provisions under sections 192 to 196D.

[2] Coverfox Insurance. (2019). Car Insurance. [online] Available Here.


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Author: Eshanee Bhattacharya

Eshanee is practicing in the areas of Corporate Commercial, Insolvency and Securities Law. She is an alumnus of the National Institute of Securities Markets. (MNLU Mumbai)

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