When you earn money in a country and reside in another, you have to pay taxes on your income in both countries. It is an unfair liability on the taxpayer. This is called double taxation.
The Double Taxation Avoidance Agreement, or DTAA, is a government-level tax treaty (between two or more countries). The basic purpose of these agreements is to devise a mechanism for the elimination of double taxation.
India’s Attempts to Offer NRIs Relief from Double Taxation
India’s history of providing relief to taxpayers dates back to Income Tax (Double Tax Relief) Rules in 1939.
Under the Income Tax Act 1961 of India, there are two provisions (Section 90 and 91) to provide double taxation relief.
Section 90 is for taxpayers from countries with which India has a Double Tax Avoidance Agreement. 88 DTAAs have been signed by the Government of India, out of which 85 are active as of this writing.
Section 91 is for taxpayers from countries with which India does not have a Double Tax Avoidance Agreement in place. It is called Unilateral Relief.
Different Models of DTAA
Not all DTAAs are similar in their benefits and conditions.
The two most popular types of models on which DTAAs are framed are the UN Model and Organization for Economic Co-operation and Development (OECD) Model. While the former emphasizes taxation at the source of income, the latter focuses on taxation at the country of residence.
Most DTAAs signed by India are based on the UN Model.
Types of DTAA Signed by India
The DTAA signed by India with other countries can be divided into two types.
- Comprehensive – All types of incomes are covered. It covers taxes on income, capital, and capital gains. India has comprehensive agreements with countries like the UK, USA, Mauritius, South Africa, Brazil, China, Germany, Greece, and several other countries.
- Limited – Only certain types of income are covered. It covers income from shipping, air transport, estate, gift, or inheritance. With Afghanistan, Ethiopia, Iran, and some other countries, India has a limited DTAA.
Income Types Covered Under DTAA
DTAA saves NRIS from having to pay double taxes from the following sources of income –
- Services provided in India
- Salary received in India
- Fixed deposits in India
- Residential property held in India
- Capital gains on transferring assets in India
- Savings accounts held in India
What Taxes Are Covered Under DTAA?
What taxes are covered and what not depends on individual treaties with respective countries. The following taxes are usually covered –
- Income tax
- Wealth tax (under some treaties)
- Substantially similar taxes like surcharges and education cess
- Taxes levied in substitution of existing taxes
What Relief Mechanisms Are in Place for NRIs Under DTAA?
DTAAs work towards providing relief to NRIs from the burden of double taxation. And the relief is provided in either of the following ways –
Under this method, the tax has to be paid on the amount of foreign income minus the tax paid to the foreign government. The tax paid is treated as a deduction from income (like an expense). This way, it doesn’t completely avoid double taxation, but reduces its extent.
Under the exemption method, resident countries provide a tax exemption for income from abroad. Once taxed in the source country, the income is exempted from taxation in the country of residence. It is a great arrangement when the tax rate in the residence country is more than the country where the income originates.
The credit method is another preferred method of double tax avoidance. The country of residence gives full or partial credit of taxes that have been paid in a foreign country. This lowers the tax that needs to be paid in the foreign country. (Sometimes to zero).
Under this method, the underlying credit system can also be used for corporate tax when residents of one state pay dividends to the residents of another state.
Documents Required to Be Entitled to DTAA Benefits
To be entitled to the benefits under DTAA, the following documents are needed –
- TRC (Tax Residency Certificate)
The Finance Act 2013 mandates that individuals can claim benefits under the Double Taxation Avoidance Agreement only when a Tax Residency Certificate is submitted to the deductor (of tax).
To get a TRC, an application using Form 10FA has to be submitted to the income tax authorities. After successful processing of the application, TRC is issued as Form 10FB. The form 10FB also has to be submitted to avail DTAA benefits and relief.
- Permanent Account Number (PAN) Card
- A self-declaration and indemnity form
- Self-attested copy of the PAN card
- Self-attested copies of passport and visa
- Copy of proof of PIO (in cases where applicable)
Unilateral Relief Against Double Taxation
NRIs in countries with which India has not signed DTAA can get relief from double taxation issues under Section 91 of the Income Tax of India, 1961.
However, such relief is offered only under the following conditions –
- When the individual or corporation has been an Indian resident in the previous year.
- The income in question should have been accrued and received by the taxpayer outside India.
- When the income has been taxed in both countries. (India and the other country).
The tax should have already been paid in a foreign country.
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