What is DTAA

Consistent with the practice adopted in most of the countries in the world that have taken to levy tax on income / capital, 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 a tax payer’s own country (referred to as home country) has a sovereign right to tax him, the source of income may be in some other country (referred to as host country) which country also claims a right to tax the income arising in that 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.

Due to phenomenal growth in international trade and commerce and increasing interactivity among the nations, residents of one country extend their sphere of business operations to other countries. Cross-country flow of capital, services and technology is the order of the day particularly after the country embarked on the path of globalization of economy. Presence of double or multiple taxation acts as a major determining factor in decisions relating to location of investment, technology etc. as it affects the bottom-line of a business enterprise. The effort is, therefore, to ensure that heavy tax burden is not cast as a result of double or multiple taxation. The object is achieved by the Government entering into agreements with other countries whereby the respective jurisdiction is so identified that a particular income is taxed in one country only or, in case it is taxed in both the countries, suitable relief is provided in one country to mitigate the hardship caused by taxation in another jurisdiction.

Such agreements are known as "Double Tax Avoidance Agreements" (DTAA) also termed as "Tax Treaties". The statutory authority to enter into such agreements is vested in the Central Government by the provisions contained in Section 90 of the Income Tax Act in terms of which India has, by the end of March 2002, entered into 64 agreements of this nature which are comprehensive in the sense that they deal with different types of income which may be subjected to double taxation. A list of such agreements and the respective years of their coming into force forms annexure to this book. In addition there are 12 agreements which deal with only profit of enterprises engaged in operation of aircraft and 5 which are limited to shipping profit.

Apart from providing ways and means to avoid double taxation of same income, the agreements generally provide for other matters of common interest of the two countries such as exchange of information, mutual assistance procedure for resolution of disputes and for mutual assistance in effecting recovery of taxes. Treaties being international agreements, their consequences are determined according to the rules of Vienna convention on the law of Treaties of 1969. Article 31, 32 and 33 of the convention lay down the rules for interpretation of these treaties. The commentaries by OECD and UN based on respective models also provide material for interpretation of the treaties. The terms and expressions, if not defined in the treaties, take their meaning from respective domestic law in case they are defined there.