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29 Jul, 2024
By Online Legal India
Published On 16 Mar 2023
Updated On 01 Jan 2025
Category Taxation
The world is interconnected today, and people of a country can reside legally in another country for study, business, and many other purposes. When people of a country earn currency from another country will be liable for paying double taxes from both countries in accordance with the Income Tax Act.
The concept of Double Taxation Avoidance Agreements (DTAA) was first introduced in the 1960s through the OCED Model Tax Convention. However, India signed this model first with the United Kingdom in 1993.
The DTAA is a treaty between two or more countries to avoid the double taxation problem when any individual earning from different countries should not pay taxes in both countries against their earnings. Different countries have signed DTAAs at different times. These agreement helps solve deformities in modern economic realities and international tax standards.
India Has Signed DTAA with How Many Countries?
As of the records of 2024, India has signed DTAA with more than 90 countries. The people earning by profession or business in all these countries will be capable of avoiding double deductions.
India is trying to sign DTAA with more and more countries to negotiate with other countries to improve bilateral trade, investment flows, and economic cooperation. As it is a continuous process and India is enlisting more countries in the DTAA downline, you can check the exact number of countries in this treaty from the website of the Income Tax Department of India.
DTAA plays a crucial role in international business and professional transactions and similar landscapes. The primary objectives of the Double Taxation Avoidance Agreement (DTAA) are mentioned as follows:
Avoidance of Double Taxation-DTAA
This is the primary objective of DTAA. This treaty helps solve double taxation by both countries where the earning is reaching and from where it is disbursing.
This is the cornerstone of any DTAA. It ensures that Income earned in one country by a resident of another is taxed in just one of the two countries, thereby preventing the same Income from being taxed twice. This is particularly important for multinational corporations and individuals who operate across borders.
Prevention of Tax Evasion: DTAA agreements often include provisions that help prevent tax evasion, ensuring taxpayers cannot exploit loopholes in international tax rules to avoid paying taxes.
Information Exchange: These agreements often facilitate the exchange of information between the countries' tax authorities. This exchange is crucial for enforcing tax laws and preventing illegal activities like tax evasion and money laundering.
Specific vs. Comprehensive Agreements: DTAAs can be comprehensive, covering all types of Income and capital, or limited to specific sectors or types of Income. Comprehensive agreements provide a broad framework covering various income sources, while sector-specific agreements focus on particular areas like Income from aviation, shipping, etc.
The Double Taxation Avoidance Agreement (DTAA) offers several advantages for Indian residents, particularly in managing international Income and investments. Some of these benefits include:
DTAA can provide exemptions from tax in certain situations, particularly beneficial for those in business and trade. For example, capital gains may be exempt under DTAA, but it's important to understand the specific terms and conditions that apply to claiming such exemptions. According to the treaty of the Double Taxation Avoidance Agreement, the double taxation is omitted and the individual or permanently established companies can be charged as the case may be. This treaty elucidates the taxation process by improvising the benefits.
The DTAA treaty helps individuals claim tax credits from the country where the income was generated. It helps prevent paying taxes in both countries and if it is deducted from both countries, this system helps refund the amount to your account. Thus it helps companies and individuals.
DTAA has guidelines on international taxation on earnings. So, you will get legal transparency and certainty about legal compliance and clarity about the paid tax. This enhances the foreign investment and earnings for the country.
For the DTAA agreement, the tax deduction on source (TDS) rates are reduced and the Indian people receive its dividends. For this reason, the entire treaty helps save significant money, especially the people who have substantial dividend earnings.
In certain cases, if any company runs a business in the countries under the DTAA treaty, it will get reduced or rebated taxation. This will provide the company getting financial relief to businesses operating crossing the borders under DTAA-signed countries.
Types of Double Taxation Avoidance Agreements (DTAAs)
DTAA is divided into different types. Each type is created for the demands of specific needs. Some of the relationship treaties have been fixed between two countries and some of them are signed in multiple countries. The types are:
The name of the agreement defines its purpose. This treaty is signed between two countries and the terms and conditions will remain between two countries. Bilateral treaties are signed by maintaining the regulations of specific economic and taxation contexts. These treaties are common for DTAA signing purposes between countries. The understanding remains between the two countries and the other countries will never enter the taxation process.
This agreement is built for a common economic framework from which the signed countries will benefit. However, the treaty may provide benefits to some countries and some countries may get broader benefits. So, this agreement is less common than a bilateral DTAA treaty. When a bilateral treaty has the scope of discussion and specific financial considerations for it, the multilateral treaty is common for all that the countries have to sign among them.
Multilateral treaty is built for international cooperation such as SAARC (South Asian Association for Regional Cooperation) or APAC (Asia-Pacific) conventions. These treaties standardize the norms and rules across the border of the country which simplifies the international investment for countries within the group.
Limited DTAA is signed between countries with some limited scope of facility or specific types of income. For example, a limited DTAA treaty may cover the income earned for operating airplanes, ship operations, etc. that are involved in international traffic. This traffic is significant between two countries not for specific person and company. So, this treaty does not require to cover comprehensive DTAA with specific earnings. However, each DTAA ensures the tax deduction in both countries dealing with any financial activities.
DTAA Rates
Double Tax Avoidance Agreement or DTAA signed between countries or among countries in Multilateral Treaties. Still, you have to understand the ratio of the tax rates.
Different Rates for Different Countries: Usually DTAA treaties are signed between countries and the rates of taxes are also defined there. Whichever country it is, the taxes will be charged according to the signed treaty not more or less than that.
There is no expiry date: these agreements don’t have any expiry date until both countries want to change it for their broader perfective. On the other hand, if one country wants to change the taxation details, the other country needs to agree to discuss the matter. Once both countries agree to the new treaty, the taxes may be different. At that point, the previous agreement will expire.
TDS Rates for Interest: TDS or Tax Deduction on Source usually ranges between 10% and 15%. However, it may be different by the specific agreement.
Tax on Dividend Income: If any foreign company or non-resident of India receives dividend income from India, the tax will be calculated according to the DTAA treaty.
As previously mentioned, India has a Double Taxation Avoidance Agreement (DTAA) signed with more than 90 countries as of 2024 data. The more treaties in this regard that are signed between countries, the greater the benefits to the people, companies, or Government of India.
Documents Required and Steps for Availing DTAA Tax Benefits
To avail of the benefits of DTAA or Double Taxation Avoidance Agreement, it is essential to learn whether India has a treaty with the specific country. If the treaty is present, you can apply for the DTAA facilities and related tax exemption. If any NRI or non-resident Indian wants to claim tax benefits under DTAA, they have to submit a form filled with the following documents:
Therefore, you have to understand how you can benefit from Double Taxation Avoidance Agreements (DTAA). You also have received the information about its claiming process and the benefits of DTAA treaty. If there is no DTAA treaty between countries, you can also apply for a Double Tax Deduction Exemption under section 91. If you want to get NRI tax deduction-related support, contact Online Legal India. What are you waiting for? Contact us today.
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