Double taxation avoidance agreement
Double taxation may arise when the jurisdictional connections, used by different countries, overlap or it may arise when thetaxpayer has connections with more than one country. A person earning any income has to pay tax in the country in which theincome is earned (as source Country) as well as in the country in which the person is resident. As such, the said income isliable to tax in both the countries. To avoid this hardship of double taxation, Government of India has entered into DoubleTaxation Avoidance Agreements (DTAA’s) with various countries. DTAA’s provide for the following reduced rates of tax ondividend, interest, royalties, technical service fees, etc., received by residents of one country from those in the other.
India has a well-developed tax structure with a three-tier federal structure, comprisingthe Union Government, the State Governments and the Urban/Rural Local Bodies. Thepower to levy taxes and duties is distributed among the three tiers of Governments, inaccordance with the provisions of the Indian Constitution. Since 1991 tax system inIndia has under gone a radical change, in line with liberal economic policy and WTOcommitments of the country like reduction in custom and excise duties, loweringcorporate tax, widening of the tax base and toning up the tax administration. Thephenomenal growth in international trade and commerce and increasing interactionamong nations, citizens, residents and businesses of one country has extended theirsphere of activity and business operations to other countries. To avoid hardship toindividuals and also with a view to ensure that national economic growth does notsuffer,
the Central government under Section 90 of the Income Tax Act has enteredinto Double Tax Avoidance Agreements with other countries.
(1)Protection against double taxation:
These Tax Treaties serve the purpose of providing protection to tax-payers against double taxation and thus preventing anydiscouragement which the double taxation may otherwise promote in the free flow of international trade, international investment and international transfer of technology;
(2)Prevention of discrimination at international context:
These treaties aimat preventing discrimination between the taxpayers in the international field andproviding a reasonable element of legal and fiscal certainty within a legal framework;
(3)Mutual exchange of information:
In addition, such treaties containprovisions for mutual exchange of information and for reducing litigation by providingfor mutual assistance procedure; and
(4)Legal and fiscal certainty:
They provide a reasonable element of legal andfiscal certainty within a legal framework.
WHAT IS DOUBLE TAXATION?
Double taxation can be defined as the levy of taxes on income or capital in the handsof the same tax payer in more than one country, in respect of the same income orcapital for the same period.
Double taxation may arise when the jurisdictionalconnections, used by different countries, overlap or it may arise when the taxpayer