What is DTAA (Double Taxation Avoidance Agreement)

It is quite often that people from one nation travels abroad to work and earn good amount of income. However, travelling to foreign countries and earning there gets them into certain tax compliances. Indian provisions of income tax also include NRIs and people earning income in foreign countries. The question arises as to whether such incomes will be taxed in the country in which they are earned or in the country of their residence.

To help people tackle this issue, A Double Taxation Avoidance Agreement (DTAA) which is a bilateral treaty between two countries are designed to prevent the same income from being taxed twice. From India’s context these are the agreements between India and other countries, where agreements are made to help people provide clarity about their taxability in either of the country. As per these agreements, one country collects the tax on income whereas another country exempts such income from taxes.

To whom DTAA are applicable?
DTAA applies only when the particular 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).

Based on the residential status of the persons involved, DTAA between India and another country is applied.

Application of DTAA?

• Determine the income which is subject to DTAA and calculate tax liability on the same as per Income Tax Act.
• If the income falls under specific provisions of DTAA, then the income will be taxed as per those provisions mentioned in DTAA.
• Section 90(2) is applied for such income to determine which provisions are more beneficial to the assessee, keeping in mind that the provisions of DTAA override.

How does DTAA work practically?

There are two principles on which DTAA provisions are based on.

• Source Rule
• Residence Rule

As per the source rule, income is taxed in the country of origin of income irrespective of residential status. As per the resident rule, income would be taxed in the country where you reside, irrespective of the income’s origin.

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

• Salary received
• Payment for services rendered in India
• Interest on fixed deposits in India
• Income from house property located in India
• Interest earned on savings bank account maintained in India
• Capital gains on transfer of assets in India

Types of Tax Reliefs under DTAA as per the Indian Laws:
Section 90 Relief:
This relief is related to those countries with which India has entered a DTAA treaty. This is called as a bilateral relief where the relief is granted in two ways:

Tax Exemption- 
Income from another country is either taxed in any one country, or a specific portion of the income is taxed in both countries.

Tax Credit-

Under this method, income is taxed in both countries i.e. source country and resident country. Afterwards, in resident country a tax credit is given for the already paid taxes in income’s source country.
Under this method, income is taxed in both countries i.e. source country and resident country. Afterwards, in resident country a tax credit is given for the already paid taxes in income’s source country.

Section 91 Relief:
There is a unilateral tax relief if there is no DTAA treaty between India and the country in which the income originates. The concept of average tax rate is applied in this case. Here, the income would be taxed twice and a deduction from the Indian income tax would be allowed. The rate of the deduction would be lower of the average tax in India or the average tax of the source country, whichever is lower. The average tax rate would be total the tax paid divided by the total income multiplied by 100. If, both tax rates are equal, the Indian tax rate would be allowed as a deduction.

Mandatory Documents to claim DTAA benefits:

• Form 10F
• Original TRC (Tax Residence Certificate) 
• Self declaration from NRI
• Self attested copy of Passport, VISA and PAN

Conclusion:
The benefits of DTAAs include reduced tax liability, greater certainty and clarity in tax compliances. People will not be mandated to pay the tax twice on the same income in different countries. The tax reliefs provided by Income Tax are beneficial to NRIs earning income in foreign countries. Also the documentation and compliance part is also limited when it comes to claiming of DTAA provisions.

CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.