Double Taxation Avoidance Agreements (DTAA) is essentially bilateral agreements entered into between two countries that aim to avoid or eliminate double taxation of the same income in two countries. These DTAAs are popularly even known as Tax Treaty.
The Tax Laws of many countries have provisions to tax their residents on their global income. Accordingly many of our fellow Indians who leave India and become tax resident in overseas country are liable to pay tax on their Indian Income earned out of their assets or investments in India. This results to paying tax in India and even in overseas country.
To overcome this, the treaty provides for beneficial clauses to claim credit of taxes paid in India while computing tax liability in the overseas country. The treaties also have many beneficial provisions related to withholding taxes and tax rates that restrict the right of India to tax income at the rate specified in the treaty which overrides the tax rates and provisions of local tax laws of India.
For example, rate of tax on Interest Income under treaty with many countries is restricted to 10% and hence you may opt to get taxed in India on this income at 10% instead of tax rate as per local law which may go up to 30%.
India today has DTAAs with almost every country across the globe and every Individual or entity having cross border income should avail maximum possible benefits of it.
While understanding the benefits it is also important to know that in order to avail benefits of treaty it is mandatory to provide the proof of residency in form of Tax Residency Certificate issued by the revenue authorities of the country of your residence.
In case you wish to know more on this, write to our International Taxation expert on sanjeev@kdpaccountants.com
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