Earning a living is a fundamental aspect of life, but grappling with dual tax obligations in both your home country and the nation where you work can be quite taxing financially and administratively. To alleviate this issue, India has inked DTAA with 85 countries, offering relief to Indian citizens earning internationally. Discover the key elements of this agreement, from its scope and advantages to the rates involved, in the following article.
What is a DTAA?
The DTAA (Double Taxation Avoidance Agreement) is a formal treaty established between two or more countries. Its purpose is to relieve taxpayers from the burden of paying taxes on the same income in multiple nations. DTAA applies to an individual residing in one country but earning income in another.
DTAAs can be comprehensive, covering all income sources, or specific, focusing on particular areas such as income from shipping, inheritance, and air transport. India currently has a Double Taxation Avoidance Agreement signed with more than 80 countries and plans to expand its network further. Notable nations that have established comprehensive DTAA agreements with India include the United Arab Emirates, Mauritius, Germany, Singapore, the United Kingdom, Canada, Australia, and the United States of America.
Who is Eligible for a DTAA in India?
In India, individuals are eligible for DTAA benefits if they are residents of India and have earned income from a country with which India has a DTAA. Residence in this context is determined based on one of the following criteria-
- Staying in India for 182 days or longer in a single financial year.
- Staying in India for 60 days or more during the financial year, as well as 365 days or more during the preceding four years, constitutes the requirement.
Indian residents eligible for DTAA benefits can obtain a Tax Residency Certificate (TRC) as proof of their residence. The TRC is a mandatory document required to claim the benefits of the Double Taxation Avoidance Agreement.
It is essential to note that eligibility for DTAA benefits can vary depending on the specific terms outlined in the DTAA between India and the respective country. Seeking advice from tax experts or relevant authorities is advisable to fully understand the eligibility criteria and procedures for claiming DTAA benefits.
What are the Benefits of DTAA in India?
Some significant advantages of DTAA include-
- Avoidance of double taxation: DTAA ensures that individuals or businesses do not pay taxes on the same income in both countries. Multinational companies operating in multiple countries greatly benefit from this practice as it allows them to avoid a substantial tax burden.
- Promotion of cross-border investment: DTAA can encourage increased foreign investment in India by reducing the tax burden on foreign investors. This can generate employment opportunities, stimulate economic growth, and improve the country’s infrastructure.
- Facilitation of trade: DTAA can facilitate international trade by reducing the tax burden on businesses engaged in cross-border transactions. This can facilitate Indian businesses’ competitiveness in global markets and enhance foreign enterprises’ interest in investing in India.
- Avoidance of double taxation on capital gains: DTAA also covers the taxation of capital gains, which is a significant advantage for investors. It prevents the double taxation of capital gains earned in both countries.
- Enhanced transparency: DTAA requires countries to exchange information and cooperate in enforcing tax laws. This enhanced level of transparency has the potential to effectively combat tax evasion while fostering a more equitable and streamlined taxation system.
Documents Required to Claim DTAA in India
Individuals who are residents of countries with DTAA agreements with India may need to provide specific documents to Indian tax authorities. The exact documentation requirements can vary depending on individual circumstances and the terms of the DTAA. However, some general documents needed include:
- Tax Residency Certificate (TRC): It is a document issued by the tax authorities of an individual’s country of residence. Its purpose is to certify the individual’s residency for tax-related matters.
- Self-declaration: Some situations may require a self-declaration confirming the individual’s residency in the DTAA country and eligibility for benefits.
- Form 10F: This form is necessary to claim DTAA benefits and includes personal information such as name, address, tax identification number, and the relevant DTAA provisions being relied upon.
- Income and tax documents: Supporting documents like tax returns, financial statements, and other income-related records may be necessary to substantiate the claim for DTAA benefits.
- Additional supporting documents: In certain situations, you may need to provide additional documentation to support your residency claim. This might include proof of residency, tax payments within the country of residence, and any other relevant records that are required.
What are the Methods of DTAA?
DTAAs provide relief from double taxation through two primary methods:
- Exemption Method: Under this approach, the income taxed in one country is exempt from tax in the other country. The taxpayer is taxed solely in their country of residence, and the source country offers an exemption on income generated within its borders. For example, if a US resident earns income in India, they would be taxed in India. Still, if they also pay taxes on that income in the US, they can claim an exemption in India as per the DTAA between the two nations.
- Tax Credit Method: In this method, income taxed in one country can be claimed as a credit against the tax liability in the other country. The taxpayer is subject to taxation in both countries but can offset taxes paid in one against the tax obligation in the other. For instance, an Indian resident earning income in the US and paying taxes on that income in the US can claim a credit for the US tax paid against their Indian tax liability, following the DTAA between the two countries.
The choice between these methods depends on the specific provisions of the relevant DTAA, the nature of the income, the tax laws of both countries and the individual’s residency status.
DTAA Rates in India with Different Countries
DTAA rates in India vary depending on the specific agreements made between India and each country. Here are some DTAA rates with select countries:
| Country | Rates |
|---|---|
| United States of America | 15% |
| United Kingdom | 15% |
| Canada | 15% |
| Australia | 15% |
| Germany | 10% |
| South Africa | 10% |
| New Zealand | 10% |
| Singapore | 15% |
| Mauritius | 7.5% to 10% |
| Malaysia | 10% |
| UAE | 12.5% |
| Qatar | 10% |
| Oman | 10% |
| Thailand | 25% |
| Sri Lanka | 10% |
| Russia | 10% |
| Kenya | 10% |
Please remember that these rates can change and may be updated in the future. The applicable rate for a specific case depends on the provisions outlined in the DTAA between India and the respective country.
Conclusion:
DTAA plays a crucial role in simplifying tax matters for individuals and businesses operating internationally. It helps prevent the issue of being taxed twice, encourages cross-border investments, promotes trade, and increases transparency. These agreements contribute to creating a fairer and more efficient global tax system.
To benefit from these agreements, individuals need to understand the specific provisions within DTAA agreements between countries and seek guidance from tax experience. Additionally, staying updated on the latest DTAA rates with different countries is necessary for accurate tax planning and compliance.
