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What Is DTAA (Double Taxation Avoidance Agreements)?

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Most of the countries in the world follow the same practice to levy tax on the income or capital of there residents. Following the same practice India also impose Income Tax on residents on the “total world income” i.e. income earned anywhere in the world.

With the phenomenal growth in international trade and commerce people are moving from there home country to other countries. Once moved out from the home country they come under the status of non residents so they are likely to be covered by the laws of at least two countries, one country of which they are residents and second where such persons are earning income as non residents. Now the main question arises, where a tax payer will be taxed on his income earned outside his home country?

Although a tax payers own country(home country) has the supreme right to tax him, but the source of the income can be from some other country (host country) which can also claims a right to tax the income arising in that country. For instance: Income arising to a resident out of India is subjected to tax in India as it is part of total world income and, also in host country which provides the source for that income. Here comes the problem of double taxation.

Due to the increasing interactivity among the nations it is in the interest of all countries to ensure that undue tax burden is not cast on persons earning income by taxing them twice, once in the country of residence and again in the country where the income is derived.

Double taxation can be defined as the levy of taxes on income / capital in the hands of the same tax payer in more than one country in respect of the same income or capital for the same period.
To avoid such a hardship to individuals and to ensure that national economic growth does not suffer, Double Taxation Avoidance Agreements (D.T.A.A.) are entered into with other countries.

DTAA is a tax treaty that India has with 74 other countries. In other words, what this means for an NRI is, if he or she is a resident in any of those 74 countries and is paying taxes on the income earned in that country, then he or she is eligible for a lower deduction of tax on income earned in India in that financial year. DTA Agreement between India and another country covers only residents of India and the other contracting country who has entered into the agreement with India. A person who is not resident either of India or of the other contracting country cannot claim any benefit under the said DTA Agreement.

To put it in a simple way, this means that if you are a Singapore resident paying taxes in the Singapore and qualifying as an NRI or PIO as per the FEMA definition, then you can submit the requested documents by your bank or AD and avail a lower withholding of tax. You will be taxed at 15 percent for the interest income earned on your NRO account and deposits rather than the standard 30 percent.

Govt. of India has entered into DTAA agreement with several countries, find the list of all the countries under DTAA agreement with India and their tax withholding rates. Withholding Tax Rates under Income Tax Department, Government Of India

DTAA1

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Every bank have there own process and documentation from the NRI to determine eligibility for the DTAA benefit. This is beneficial to ensure that the rate under DTAA is applied on your TDS withholding. In case you have not claimed for this benefit with the bank, you are eligible to seek a refund from the revenue authorities under this treaty. If you have been eligible but have not claimed your benefit in this year, to get a refund for past periods, you may have to place a refund request with the Indian Income Tax authorities.

One important aspect for claiming DTAA, is that the Permanent Account Number(PAN) has been made mandatory to avail the benefit of lower withholding under DTAA. Also important to note, there is an expiry date on the documentation and the same needs to be refreshed every financial year with the bank and or AD to ensure validity.

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With the current financial year ending on Mar 31st, it will be a good idea to connect with you bank and check on the requirements and renewal of the DTAA facility for your NRO accounts and or deposits.

One more thing to keep in mind is that with the Direct Tax Code (DTC) coming into picture, effective April 2012, submission of a TRC, Tax residency Certificate, issued by the revenue authority in the country of tax residency has been made mandatory. While this will make the documentation process uniform across banks, it will be cumbersome process for the customer.

One comment

  1. Hi ,
    As per DTAA agreements, for example I am a resident of India employed with Chinese base company and earning money from China in Dollars to my India Account, Since that company is not have Permanent Establishment in India and no operations.

    My chinese company is paying Tax on my behalf as I am employee of company like others. I got tax receipts which states my Passport No. and my name and tax paid against me.
    So under act 90 DTAA ,i should get relief India , right ?
    Since the tax paid in other country is part of my salary ..

    Plz help me to clarify this query – my mail id is u1kumar2002@gmail.com

    Thanks,

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