DTAA: Meaning, benefits & application

When it comes to earning money, paying taxes is like an unavoidable reality. Now, if you are an Non-Resident Indians (NRI) with investments in India, any income you make from those investments can be taxed. But here's the catch: you might also be earning money in the country you're living or working in. That means you could end up being taxed on the same income by both countries. It's like paying for the same thing twice!

To fix this, there's something called the Double Taxation Avoidance Agreement (DTAA). It was started in 1927 by the Fiscal Committee of the League of Nations. DTAA ensures you don't have to pay taxes twice on the same income. So, if you earn money in a different country, DTAA helps you figure out how much tax you owe and where you owe it.

What is DTAA?

DTAA refers to a treaty signed between two or more countries to help taxpayers avoid being taxed twice on the same income.

For instance, if you're an NRI with investments in India, you would typically have to pay taxes on any dividends or income from those investments in both India and the United States. However, with a DTAA in place between the two nations, you're relieved from the burden of dual taxation, allowing the income from your US investments to be taxed in only one country, based on the DTAA's terms. DTAA ensures NRIs don't face pay hefty taxes in two nations. It's also instrumental in reducing tax evasion incidents.

It's important to understand that such agreements encompass a broad spectrum of income types, including earnings from employment, business profits, dividends, interest, and royalties to capital gains and more.

Each DTAA lays out clear rules about the kinds of income that each country can tax. Typically, the country where the income originates is granted the primary right to tax the said income. However, the country where the taxpayer resides may also have the authority to tax the income but often at a reduced rate, as per the DTAA in place.

Benefits of DTAA

Tax savings: By leveraging the DTAA, individuals and businesses can take advantage of the lower tax rates between the two countries, leading to tax savings.
Streamlined international business: The risk of double taxation can deter international business activities; DTAA removes this hurdle, promoting global trade and investment.
Legal certainty: DTAAs offer taxpayers clear guidelines on their tax duties, providing a sense of legal certainty and aiding in financial and business planning.
Prevention of fiscal evasion: These agreements help in curbing tax evasion by setting forth definitive tax compliance measures for cross-border income.
Economic growth: Facilitating trade and investment between countries, DTAAs play a role in boosting economic growth and creating new opportunities for business ventures and job creation.

Documents required for DTAA

If you are aiming to avail of the DTAA benefits, you must submit a specific set of documents:

1. Tax Residency Certificate (TRC)

A TRC is a crucial document issued by the country of residence, certifying an individual's or entity's status as a resident for tax purposes. This certificate is a key piece of evidence in the DTAA application process, as it verifies to the source country that the taxpayer is liable to tax in the resident country.

2. Form 10F

Form 10F is a declaration form that taxpayers must fill out to detail their tax residency as part of the DTAA claim process. This form requires information about the taxpayer's residency status, and other relevant details necessary for determining DTAA eligibility. It's important to highlight that e-filing of Form 10F is required to avail treaty benefits. Nevertheless, non-residents have the option to register on the IT portal and file without a PAN.

3. Form 67

Form 67 is required for taxpayers in India who wish to claim a foreign tax credit for taxes paid in another treaty country. This form is a part of the process to ensure that taxpayers do not pay tax twice on the same income. By submitting Form 67, taxpayers can offset taxes already paid abroad against their tax liability in India under the DTAA provisions.

How to apply for DTAA?

Assessing tax obligations under local laws: First, determine the category of income subject to DTAA and the corresponding tax liability according to the local Income Tax Act.
Determining DTAA's applicability: If the income type is specified within particular articles of the DTAA, it will be taxed in line with those provisions.
Deciding the final tax charge: Refer to section 90(2) to choose the more favourable tax terms between the Income Tax Act and the DTAA, which is known as Treaty Override.

How do you claim DTAA benefits?

Deduction: This approach allows taxpayers to deduct the tax paid to a foreign government from their income in the resident country.
Exemption: With this method, the taxpayer can receive tax relief entirely in one of the two countries involved.
Tax credit: This method offers tax relief by providing a credit for the amount of tax paid abroad against the domestic tax liability.

Also Read: Eligibility, types, & meaning of Non-resident Indian (NRI) Account

Conclusion

India has strategically signed Double Taxation Avoidance Agreements (DTAA) with several countries to alleviate the burden of dual taxation for Non-Resident Indians (NRIs), Persons of Indian Origin (PIOs), and Overseas Citizens of India (OCIs). Tailoring to such specialised needs, Axis Bank offers bespoke banking solutions such as NRE Savings Accounts and NRO Savings Accounts, along with FCNR (B) Deposits, enhancing the financial prosperity of account holders.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.