DTAA  (Double Taxation Avoidance Agreement) 

As the world becomes more connected and globalised, it has become increasingly common for individuals and companies to conduct business across borders or work remotely. This also means they may have to pay taxes in multiple countries from where they earn their income. This can lead to double taxation. This is where Double Taxation Avoidance Agreements (DTAAs) come in.

What is Double Taxation Avoidance Agreement (DTAA)?

The Double Tax Avoidance Agreement (DTAA) is a treaty signed by two countries. It is signed to make a country an attractive destination and to enable NRIs to get relief from having to pay taxes multiple times. DTAA does not mean that the NRI can completely avoid taxes, but it does mean that the NRI can avoid paying higher taxes in both countries. DTAA also reduces the instances of tax evasion.

The DTAA agreements cover a range of income such as income from employment, business profits, dividends, interest, royalties, capital gains, among others. These agreements specify guidelines as to which country holds the right to impose taxes on particular types of income. Typically, the country where the income is generated retains the primary right to levy taxes on it, whereas the country of residency may also impose taxes, at a lower rate.

DTAA Rates 

DTAA, signed by India with different countries, fixes a specific rate at which tax has to be deducted on income paid to residents of that country. This means that when NRIs earn an income in India, the TDS applicable would be according to the rates set in the Double Tax Avoidance Agreement with that country.

How to Determine if DTAA is Applicable?

Follow these steps to determine which Double Taxation Avoidance Agreement (DTAA) applies in your case:

Step 1 – Is DTAA applicable?

• DTAA applies only when the transaction is taxable both in India and in another country. Also, one party involved in the transaction should be a non-resident (NR) or a foreign company (FC).

Step 2 – Which DTAA is applicable?

• Identify the residential status of the non-resident party. DTAA between India and that country will be applicable

How to Apply DTAA?

The following are the steps to determine how to apply DTAA:

• Tax Liability as per Income Tax Act: Find out the type of income on which DTAA applies and its tax liability under the Income Tax Act.
• Tax liability under the DTAA: If the income falls under specific articles of DTAA, then the income will be taxed as per those articles.
• Finalize the tax liability: Using section 90(2), decide which is more advantageous between the IT Act and DTAA (Treaty Override).

Note: If the NR/FC has a Permanent Establishment (PE) in India, then general articles for taxation would apply.

How to Claim DTAA Benefits?

The benefit of DTAA can be claimed by three methods:

• Deduction: Taxpayers can claim the taxes paid to foreign governments as a deduction in the country of residence.
• Exemption: Tax relief under this method can be claimed in any one of the two countries.
• Tax credit: Tax relief under this method can be claimed in the country of residence.

On What Type of Income DTAA is Applicable?

Under the Double Tax Avoidance Agreement, NRIs don’t have to pay tax twice on the following income earned:

• Services provided in India.
• Salary received in India.
• House property located in India.
• Capital gains on transfer of assets in India.
• Fixed deposits in India.
• Savings bank account in India.

If income from these sources is taxable in the NRI’s country of residence, they can prevent double taxation by utilizing the benefits of the DTAA.

List of countries with which DTAA is signed

India has signed a Double Tax Avoidance Agreement with almost 100 major nations where Indians reside. Some of these countries are: