Double Taxation in India
India has entered into
Double Taxation Avoidance Agreements (DTAA) with 65 countries including
countries like U.S.A., U.K., Japan, France, Germany, etc. These agreements
provide for relief from double taxation in respect of incomes by providing
exemption and also by providing credits for taxes paid in one of the countries.
These treaties are based on the general principles laid down in the model draft
of the Organisation for Economic Cooperation and Development (OECD) with
suitable modifications as agreed to by the other contracting countries. A
typical DTA agreement between India and another country covers only residents of
India and the other contracting country which has entered into the agreement
with India. A person who is not a resident either of India or of the other
contracting country cannot claim any benefit under the said DTA agreement. Such
agreement generally provides that the laws of the two contracting states will
govern the taxation of income in respective states except when express provision
to the contrary is made in the agreement. A situation may arise when originally
the tax provision in the other contracting state gave concessional treatment
compared to India at a particular time but Indian laws were subsequently amended
to bring incidence of tax to a level lower than the tax rate existing in the
other contracting state.Since the tax treaties are meant to be beneficial and
not intended to put taxpayers of a contracting state to a disadvantage, it is
provided in Sec.90 that a beneficial provisions under the Indian Income Tax Act
will not be denied to residents of contracting state merely because the
corresponding provision in tax treaty is less beneficial.
Some Double taxation avoidance agreements provide that income by way of interest, royalty or fee for technical services is charged to tax on net basis. This may result in tax deducted at source from sums paid to non- residents which may be more than the final tax liability. Taxation of Business Profits under DTA agreements One of the important terms that occurs in all the Double Taxation Avoidance Agreements is the term 'Permanent Establishment' (PE) which has not been defined in the Income Tax Act. However as per the Double Taxation Avoidance Agreements, PE includes, a wide variety of arrangements i.e. a place of management, a branch, an office, a factory, a workshop or a warehouse, a mine, a quarry, an oilfield etc. Imposition of tax on a foreign enterprise is done only if it has a PE in the contracting state. Tax is computed by treating the PE as a distinct and independent enterprise. In order to avoid double taxation it is provided that if a resident of India becomes liable to pay tax either directly or by deduction in the other country in respect of income from any source, he shall be allowed credit against the Indian tax payable in respect of such income in an amount not exceeding the tax borne by him in the other country on that portion of the income which is taxed in the said other country. The same benefit is available to the resident of the other Country, on income taxed in India. In respect of incomes on which taxes are either exempted or reduced, the country of residence will not take the exempted income into account while determining the tax to be imposed on the rest of the income. Taxation of Income from Air and Shipping Transport under DTA agreements Income derived from the operation of Air transport in international traffic by an enterprise of one contracting state will not be taxed in the other contracting state. In respect of an enterprise of one contracting state, income earned in the other contracting state from the operation of ships in international traffic, will be taxed in that contracting state wherein the place of effective management of enterprise is situated. However some DTA agreement contain provisions to tax the income in the other contracting state also, although at reduced rate. These provisions do not apply to coastal traffic. Taxation of Income from Associated Enterprises under DTA agreements In order to plug loop holes for tax evasion, a separate article in DTA agreement provides for taxing the notional income deemed to arise on account of an enterprise of one contracting state participating directly / indirectly in the management of another enterprise in the other contracting state or where some persons participate directly or indirectly in both the enterprises under conditions different from those existing between the independent enterprises. Taxation of Dividend Income under DTA agreements Dividend paid by a Company which is a resident of a Contracting State to a resident of the other Contracting State will be taxed in both the States. Taxation of Interest Income under DTA agreement Interest paid in a Contracting State to a resident of the other Contracting State is chargeable in both the States. Taxation of Income from Royalties under DTA agreements Regarding Royalties arising in a Contracting State and paid to a resident of the other Contracting State
Taxation of Income from Capital Gains under DTA agreements
Capital Gains will be taxed in the state where the capital asset is situated at the time of sale. Taxation of Income from Professional Services under DTA Agreements Income will be taxed in the state where the person is a resident. However if he has a fixed base in the other Contracting State, the income attributable to the fixed base will be taxed in the other contracting state. Double Taxation Relief where no DTA Agreements are entered into Apart from relief to persons of a country where India has entered into Double Taxation Avoidance Agreement, there is relief given even in cases where the Government of India has not entered into DTA agreement with any foreign country. In such cases if any resident Indian produces evidences to show that he has paid any tax in any country with which the Government of India has not entered into a DTA agreement, tax relief on that part of his income which suffered taxation in the foreign country, to the extent of tax so paid in such foreign country, or the tax leviable in India under the Income Tax Act on such income whichever is less, shall be allowed as deduction u/s 91 while calculating his tax liabilities on such income. Double Taxation Avoidance Agreements In case of countries with which India has double taxation avoidance agreements, the tax rates are determined by such agreements and are indicated for various countries as under
These agreements follow a near uniform pattern in as much as India has guided itself by the UN model of double taxation avoidance agreements. The agreements allocate jurisdiction between the source and residence country. Wherever such jurisdiction is given to both the countries, the agreements prescribe maximum rate of taxation in the source country which is generally lower than the rate of tax under the domestic laws of that country. The double taxation in such cases are avoided by the residence country agreeing to give credit for tax paid in the source country thereby reducing tax payable in the residence country by the amount of tax paid in the source country. These agreements give the right of taxation in respect of the income of the nature of interest, dividend, royalty and fees for technical services to the country of residence. However the source country is also given the right but such taxation in the source country has to be limited to the rates prescribed in the agreement.The rate of taxation is on gross receipts without deduction of expenses. Withholding Tax for NRIs and Foreign Companies Withholding Tax Rates for payments made to Non-Residents are determined by the Finance Act passed by the Parliament for various years. The current rates are:
The above rates are general and in respect of the countries with which India does not have a Double Taxation Avoidance Agreement (DTAA).
Some Double taxation avoidance agreements provide that income by way of interest, royalty or fee for technical services is charged to tax on net basis. This may result in tax deducted at source from sums paid to non- residents which may be more than the final tax liability. Taxation of Business Profits under DTA agreements One of the important terms that occurs in all the Double Taxation Avoidance Agreements is the term 'Permanent Establishment' (PE) which has not been defined in the Income Tax Act. However as per the Double Taxation Avoidance Agreements, PE includes, a wide variety of arrangements i.e. a place of management, a branch, an office, a factory, a workshop or a warehouse, a mine, a quarry, an oilfield etc. Imposition of tax on a foreign enterprise is done only if it has a PE in the contracting state. Tax is computed by treating the PE as a distinct and independent enterprise. In order to avoid double taxation it is provided that if a resident of India becomes liable to pay tax either directly or by deduction in the other country in respect of income from any source, he shall be allowed credit against the Indian tax payable in respect of such income in an amount not exceeding the tax borne by him in the other country on that portion of the income which is taxed in the said other country. The same benefit is available to the resident of the other Country, on income taxed in India. In respect of incomes on which taxes are either exempted or reduced, the country of residence will not take the exempted income into account while determining the tax to be imposed on the rest of the income. Taxation of Income from Air and Shipping Transport under DTA agreements Income derived from the operation of Air transport in international traffic by an enterprise of one contracting state will not be taxed in the other contracting state. In respect of an enterprise of one contracting state, income earned in the other contracting state from the operation of ships in international traffic, will be taxed in that contracting state wherein the place of effective management of enterprise is situated. However some DTA agreement contain provisions to tax the income in the other contracting state also, although at reduced rate. These provisions do not apply to coastal traffic. Taxation of Income from Associated Enterprises under DTA agreements In order to plug loop holes for tax evasion, a separate article in DTA agreement provides for taxing the notional income deemed to arise on account of an enterprise of one contracting state participating directly / indirectly in the management of another enterprise in the other contracting state or where some persons participate directly or indirectly in both the enterprises under conditions different from those existing between the independent enterprises. Taxation of Dividend Income under DTA agreements Dividend paid by a Company which is a resident of a Contracting State to a resident of the other Contracting State will be taxed in both the States. Taxation of Interest Income under DTA agreement Interest paid in a Contracting State to a resident of the other Contracting State is chargeable in both the States. Taxation of Income from Royalties under DTA agreements Regarding Royalties arising in a Contracting State and paid to a resident of the other Contracting State
- Some DTA agreements provide for taxation in the other Contracting State.
- Some agreements provide for taxation in the contracting State.
- Some agreements provide for taxation in both the States.
Taxation of Income from Capital Gains under DTA agreements
Capital Gains will be taxed in the state where the capital asset is situated at the time of sale. Taxation of Income from Professional Services under DTA Agreements Income will be taxed in the state where the person is a resident. However if he has a fixed base in the other Contracting State, the income attributable to the fixed base will be taxed in the other contracting state. Double Taxation Relief where no DTA Agreements are entered into Apart from relief to persons of a country where India has entered into Double Taxation Avoidance Agreement, there is relief given even in cases where the Government of India has not entered into DTA agreement with any foreign country. In such cases if any resident Indian produces evidences to show that he has paid any tax in any country with which the Government of India has not entered into a DTA agreement, tax relief on that part of his income which suffered taxation in the foreign country, to the extent of tax so paid in such foreign country, or the tax leviable in India under the Income Tax Act on such income whichever is less, shall be allowed as deduction u/s 91 while calculating his tax liabilities on such income. Double Taxation Avoidance Agreements In case of countries with which India has double taxation avoidance agreements, the tax rates are determined by such agreements and are indicated for various countries as under
| Name of the Country | Dividend | Interest | Royalty | Technical Fee |
| Austria | Not Mentioned | Not Mentioned | Not Mentioned | Exempt, except on amounts (net) attributable to activities performed in the state |
| Australia | 15 | 15 | 10/1/20 | No separate provision |
| Bangladesh | 10,15 | 10 | 10 | - |
| Brazil | 15 | 15 | 15/25 | No separate provision |
| Belgium | 15 | 15 | 30 | 30 |
| Canada | 15,15 | 15 | 20 | 20 |
| Czechoslovakia | 25,25 | 15 | 30 | 30 |
| Denmark | 15,25 | 10,15 | 20 | 20 |
| Federal German Republic | 15 | 10,15 | Not Mentioned | 20 |
| Finland | 15,25 | 15 | 30 | 30 |
| France | Not Mentioned | Not Mentioned | Not Mentioned | Exempt, except on amounts (net) attributable to activities performed in the state |
| Great Britain | 15 | 10,15 | 30 | 30 |
| Greece | Not Mentioned | Not Mentioned | Not Mentioned | No separate provision |
| Hungary | 15 | 15 | 40 | 20 |
| Indonesia | 10,15 | 10 | 15 | No separate provision |
| Italy | Not Mentioned | 15 | Not Mentioned | Not Mentioned |
| Japan | 15 | 10,15 | 20 | 20 |
| Kenya | 15 | 15 | 20 | 17.5 |
| Korea (South) | 15,20 | 10,15 | 15 | 15 |
| Libya | Not Mentioned | Not Mentioned | Not Mentioned | No separate provision |
| Malaysia | Not Mentioned | Not Mentioned | Not Mentioned | No separate provision |
| Mauritius | 5,15 | Nil, Not Mentioned | 15 | No separate provision |
| Nepal | 10,15 | 10,15 | 15 | No separate provision |
| Netherlands | 15 | 10,15 | 20 | 20 |
| New Zealand | 20 | 15 | 30 | 30 |
| Poland | 15 | 15 | 22.5 | 22.5 |
| Norway | 15,25 | 15 | 20 | 20 |
| Romania | 15,20 | 15 | 22.5 | 22.5 |
| Singapore | Not Mentioned | Not Mentioned | Not Mentioned | No separate provision |
| Sri Lanka | 15 | 10 | 10 | No separate provision |
| Syria | Not Mentioned | 7.5 | 10 | No separate provision |
| Sweden | 15,25 | 15,10 | 20 | 20 |
| Tanzania | 10,15 | 12.5 | 20 | 20 |
| Thailand | 15,20 | 10,25 | 15 | No separate provision |
| United Arab Republic | Not Mentioned | Not Mentioned | Not Mentioned | No separate provision |
| USA | 15,25 | 10,15 | 20,15 | 20,15 |
| UAE | 15 | 15 | 22.5 | 22.5 |
| Zambia | 5,15 | 10 | 10 | 10 |
These agreements follow a near uniform pattern in as much as India has guided itself by the UN model of double taxation avoidance agreements. The agreements allocate jurisdiction between the source and residence country. Wherever such jurisdiction is given to both the countries, the agreements prescribe maximum rate of taxation in the source country which is generally lower than the rate of tax under the domestic laws of that country. The double taxation in such cases are avoided by the residence country agreeing to give credit for tax paid in the source country thereby reducing tax payable in the residence country by the amount of tax paid in the source country. These agreements give the right of taxation in respect of the income of the nature of interest, dividend, royalty and fees for technical services to the country of residence. However the source country is also given the right but such taxation in the source country has to be limited to the rates prescribed in the agreement.The rate of taxation is on gross receipts without deduction of expenses. Withholding Tax for NRIs and Foreign Companies Withholding Tax Rates for payments made to Non-Residents are determined by the Finance Act passed by the Parliament for various years. The current rates are:
- Interest - 20% of Gross Amount
- Dividends - 10%
- Royalties - 20%
- Technical Services - 20%
- Any other Services - Individuals - 30% of net income
Companies/Corporates - 40% of net income
The above rates are general and in respect of the countries with which India does not have a Double Taxation Avoidance Agreement (DTAA).
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