Double Taxation Avoidance Agreement (DTAA)


·       The Double Taxation Avoidance Agreement or DTAA is a tax treaty signed between India and another country, so that taxpayers can avoid paying double taxes on their income earned from the source country as well as the residence country.

·       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.

·       At present, India has double tax avoidance treaties with more than 80 countries around the world.


Need for DTAA

·       The need for DTAA arises out of the imbalance in tax collection on global income of individuals.

·       DTAAs are intended to make a country an attractive investment destination by providing relief on dual taxation. Such relief is provided by exempting income earned abroad from tax in the resident country or providing credit to the extent taxes have already been paid abroad.

·       If a person aims to do business in a foreign country, he/she may end up paying income taxes in both cases, i.e. the country where the income is earned and the country where the individual holds his/her citizenship or residence. You pay twice the tax over the same income. This is where the DTAA becomes useful for taxpayers.


Benefits of DTAA

·       The basic benefit includes not having to pay double taxes on the same income.

·       In some cases, DTAA also provide concessional rates of tax.

·       It can become an incentive for even legitimate investors to route investments through low-tax regimes to sidestep taxation. This leads to a loss of tax revenue for the country.

·       DTAA also provides tax certainty to the various investors and businesses of both the countries through the clear allocation of taxing rights between the contracting states by Agreement.


Misuse of DTAA

·       India has signed DTAA with the tax havens such as Mauritius, Singapore etc. These DTAAs have been misused by the multi-national companies in order to reduce their tax liability in India.

Ø  For example, if a shell Company is registered in tax haven and carries out the operations through its subsidiary based in India. Under the provisions of DTAA, the company would be liable to pay tax only in the tax haven country, even for the profits which it makes in India. This causes significant revenue loss for India.

 

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