Double Taxation Avoidance Agreement (DTAA) is a tax treaty signed between two countries so that taxpayers can avoid paying double taxes on their income earned from the source country as well as the residence country.
DTAAs can be either be comprehensive, encapsulating all income sources, or limited to certain areas. India presently has DTAA with 80+ countries, with plans to sign such treaties with more countries in the years to come. Some of the countries with which it has comprehensive agreements include Australia, Canada, the United Arab Emirates, Germany, Mauritius, Singapore, the United Kingdom and the United States of America.
Benefits of DTAA
There are lots of benefits associated with DTAA for taxpayers. The basic benefit includes not having to pay double taxes on the same income. Apart from this,
- Lower Withholding Tax (Tax Deduction at Source or TDS)
- Tax credits
- Exemption from taxes
The Section 90 and Section 91 of the Income Tax Act, 1961, provides taxpayers relief from paying double tax. Section 90 applies to cases where India has a bilateral agreement with another nation. It reads “Agreement with foreign countries or specified territories”, while Section 90A covers “Adoption by Central Government of agreement between specified associations for double taxation relief”. Section 91 applies to cases where India does not have any bilateral agreement, rather it has unilateral agreement. It states how tax relief can be availed in case of “Countries with which no agreement exists.”
The primary idea behind DTAA agreements with various countries is to minimize the opportunity for tax evasion for tax payers in either or both of the countries between which the bilateral/multilateral DTAA agreement have been signed.
Lower withholding tax is a plus for taxpayers as they can pay lower TDS on their interest, royalty or dividend incomes in India, while some agreements provide for tax credits in the source or country of operations so that taxpayers don’t pay the same tax twice. In some cases, such as agreements with Mauritius, Cyprus, Singapore, Egypt etc. capital gains tax is exempted which can be a boon to taxpayers as they can use the DTAA agreement to minimize taxes.
DTAA Rates
The rates and rules of DTAA vary from country to country depending on the particular signed between both parties. TDS rates on interests earned for most countries is either 10% or 15%, though rates range from 7.50% to 15%.
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