DTAA or Double Taxation Avoidance Agreement is a tax agreement signed between India and other countries so that taxpayers can avoid paying double taxes on their income earned from the source country as well as the residence country. At present, India has double tax avoidance treaties with more than 80 nations around the world.
Main purpose of DTAA between two countries is avoidance of double taxation, on income earned in any of these countries.Generally under such agreements credit is allowed and taxed by the country in which the taxpayer resides, for taxes levied in the other treaty country.due to the result the taxpayer pays no more than the higher of the two tax rates.
India has Double Taxation Avoidance Agreements with several countries.India is said to provide tax relief from double taxation to its residents, to some extent.DTAA agreements and other agreements for sharing tax information between governments is an ongoing affair.
Under the IT Act 1961 of India Section 90, relief is provided for taxpayers who have paid tax to a country, with which India has signed a DTAA.
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 ranges from 7.50% to 15%.
The need for DTAA arises because of conflicting rules in two different countries about chargeability of income on basis of receipt and accrual, residential status etc. As there is no clear definition of income and taxability thereof, which is approved internationally, an income may become liable to tax in two countries. Double taxation occurs when an individual is forced to pay two or more taxes for the same income, asset, or financial transaction in different countries. Double taxation occurs mainly due to overlapping tax laws and regulations of the countries where an individual operates his business.
- The income is taxable only in one country.
- The income is exempt in both countries.
- The income is taxable in both countries, but credit for tax paid in one country is given against tax payable in the other country.
Types of DTAA
Comprehensive DTAAs are those which cover almost all types of incomes covered by any model convention. Many a time a treaty covers wealth tax, gift tax, surtax etc. too.
Limited DTAAs are those which are limited to certain types of incomes only, e.g. DTAA between India and Pakistan is limited to shipping and aircraft profits only.
Foreign nationals of several countries such as USA, Canada and UK are required to declare and pay taxes on their worldwide income. Double taxation avoidance treaties, actually help in either minimizing the tax payable to your home country or in some cases even eliminating further tax liabilities, depending on the tax rates applicable.