Need for DTAA

A DTAA is a bilateral arrangement between two countries, which forms part of the fiscal code of the respective country. This agreement can be accessed by the residents of either country and does not restrict the basic right of a sovereign country to tax the income in question. As per the Indian Income-tax Act, 1961 (the Act) or DTAA, whichever is favourable can be applied by an assessee with reference to a transaction.

Agreement with other countries

India has to-date signed comprehensive double taxation agreements with around 63 countries.

Key features of DTAA

Most of the DTAAs are drafted on the same lines. There are around 25 articles covering general matters and matters relating to definitions. The substantive portion of the articles specify the rates of tax applicable to various streams of income, relief from double taxation in respect of various categories of income and also covers procedures to resolve disputes.

Taxation under DTAA

The procedure for taxing income from interest, dividend etc are contained in specific articles to the DTAA. For example, as far as capital gains is concerned, they are usually taxable as per the domestic law of the state where it arises. RFTS is not taxable at the concessional rate if the payment is attributable to permanent establishment.

Redressal of disputes

Any dispute in the interpretation of DTAA is resolved by the mutual agreement procedure. These are contained in Rules 44G and 44H of the Income-tax Rules.

Advance Ruling

Any NRI entering into a transaction with a resident Indian can refer the matter to an Advance Ruling for a decision. The Finance Act, 2003, has clarified the scope of the Authority of Advance Ruling (AAR) to state that a resident Indian can apply to AAR only for determining the income of a non-resident. The decision of the AAR would be binding on the applicant, in respect of the transaction and on the jurisdictional Commissioner.

Relief is DTAA has not been signed

Even if India has not signed a DTAA with a specific country, a resident Indian is entitled to deduction from the Indian Income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or rate of tax of the foreign country, whichever is lower. If the tax rates applicable to India and the foreign country are same, then the deduction will be equal to the Indian rate of tax.