Double Taxation Avoidance Agreement

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What is Double Taxation Avoidance Agreement

Double taxation refers to taxation by two or more countries of the same income, asset or transaction. India has adopted the system under which Income Tax on residents is  imposed  on the “total world income” i.e. income earned anywhere in the world. Whereas the source of income may be in some other country and that country also claims a right to tax the income arising in the country. The result is that 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.

“In the case of non-residents, however, it is not the “total world income” but only that income is subjected to tax in India which is earned in this country. Since a resident is taxed in respect of foreign income in his own country as well as in the country where it is earned,  he is subjected to tax in both the countries in respect of the same income. The purpose of double tax avoidance agreement is to avoid such double taxation to the extent agreed upon.

The DTAA provides that business profits will be taxable in the source state if the activities of an enterprise constitute a Permanent Establishment (PE) there. The Agreement provides for fixed place PE, building site, construction & installation PE, service PE, insurance PE and agency PE. Dividends, interest and royalties & fees for technical services income will be taxed both in the country of residence and in the country of source.

To avoid malpractices of tax avoidance Indian government tried to bring GAAR (Genral anti avoidance rule).(First came in 2009.) However It was not enforced by modi government.

Ex. India and Mauritius has signed DTAA.

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