Double Taxation Avoidance Agreement

A resident of India pays Indian tax on worldwide income. The country where that income arises usually taxes it too, because it is the source. Left alone, the same rupee is taxed twice.

A DTAA is the agreement between the two countries that stops this. It works in one of two ways: by allocating the taxing right to one country, or — far more commonly — by the residence country giving credit for the tax already paid in the source country.

For a non-resident earning in India, it does something else as well: it offers a rate. Where a DTAA applies, the non-resident is taxed at the rate in the treaty or the rate in the Income Tax Act, whichever is more beneficial to him.

Two situations, and the exam asks about both.

Indian resident, foreign income. The income is taxable in India because a resident is taxed on global income. The source country taxes it too. India, as the residence country, allows credit for the foreign tax when computing the total Indian liability. The workbook's illustration is an Indian student earning in France and a returning NRI holding UK bonds — both pay French or UK tax and both get credit in India.

Non-resident, Indian income. Here the treaty supplies a ceiling rate, and the assessee picks whichever of the two rates is lower. The comparison is done income head by income head — the same person can take the treaty rate on one stream and the Act rate on another.

The paperwork is not optional. To claim any DTAA relief the non-resident must obtain a Tax Residency Certificate from the country of residence, and additionally furnish Form 10F, a self-declaration giving prescribed details.

Mr A is a tax resident of the USA and a non-resident in India. In the year he earns, from India:

• Interest on debentures: Rs 10,00,000
• Dividend on Indian shares: Rs 2,20,000

Notice that the answer goes one way on interest and the other way on dividend. The treaty is better on interest; the Act is better on dividend. Picking "the DTAA rate" across the board would cost him Rs 11,000 on the dividend alone.

Change one fact. Suppose Mr A is a tax resident of the UK instead. The India-UK DTAA gives a dividend rate of 10%:

Dividend tax  =  2,20,000 x 10%  =  Rs 22,000

Same investor, same shares, same Indian company — Rs 22,000 more tax for being resident in one country rather than another. And in either case he must produce a TRC plus Form 10F, or he is taxed under the Act with no relief at all.

Chapter 7 (Concepts in Taxation) introduces DTAA at section 7.15 after establishing residential status, and Chapter 10 (Taxation of Debt Products) applies it to interest and dividend income of non-residents, with the worked USA-versus-UK comparison above. Chapter 11 returns to it for dividends on equity. The examinable rule is always the same: treaty rate or Act rate, whichever is more beneficial, claimed only on production of a TRC and Form 10F.

• The DTAA rate is a ceiling, not a mandate. If the Income Tax Act rate is lower, the assessee takes the Act rate.
• The comparison is per income stream. One assessee can be on the treaty rate for interest and the Act rate for dividend in the same return.
• Relief needs a TRC and Form 10F. A question that describes a non-resident with no TRC is testing this, not the rate.
• Credit is given by the residence country, not the source country. India gives credit for foreign tax to its residents; it does not refund Indian tax to a foreigner.
• A DTAA does not make income exempt. It caps the rate or grants a credit — the income is still reported.
• Non-resident Indian citizens and persons of Indian origin have a separate route in Chapter XII-A of the Act; the workbook treats it as an alternative to, not part of, the treaty.