Check out How DTAA- Income Tax Amendment Can Help People Earning Globally

Wondering what is DTAA in income tax? A tax treaty known as the DTAA income tax is established between India and another nation (or any two or more nations), in order to prevent taxpayers from being subjected to both source and destination country taxes on their income. The DTAA full form is the Double Tax Avoidance Agreement.

The Double Taxation Avoidance Agreement assists NRIs who work abroad in avoiding paying double taxes on income earned in both their home nation and India. This agreement between India and 80 other nations.

The mismatch in tax collection on individual taxpayers' worldwide income is what drives the demand for DTAA. If someone wants to start a business abroad, they may have to pay income taxes in both the country where the income is earned and the country where they are a citizen or have a place of residence. For instance, if you leave income sources like interest from deposits in India and move to a different country, both India and the country where you are currently residing will charge you interest based on your combined worldwide profits. In such a case, you can end up paying double the tax on the same amount of income. This is where taxpayers can benefit from the DTAA.

What Are The Benefits Of DTAA?

The DTAA offers taxpayers a variety of advantages. The primary advantage is avoiding paying two taxes on the same income. In addition to this

• Withholding tax reduction (Tax Deduction at Source or TDS)

Taxpayers benefit from lower withholding tax since they can pay less TDS on their interest, royalties, or dividend income in India. Additionally, some agreements include tax credits at the source or in the country of operations to prevent double taxation. Capital gains tax may be waived in some agreements, such as those with Egypt, Singapore, Mauritius, and Cyprus, which is advantageous for taxpayers because they can use the DTAA agreement to pay as little tax as possible.

• Tax exempt status
• Tax credits

The main goal of DTAA agreements with different nations is to reduce the chance that taxpayers in either or both of the nations between whom the bilateral or multilateral DTAA agreement has been struck, will engage in tax evasion.

In order to increase a country's appeal as a viable and exciting investment site, double tax avoidance agreements seek to eliminate double taxation. This form of relief is provided by giving credit for any prior foreign taxes paid or by exempting income earned abroad from taxation in the nation of residence. 

If someone is required to travel overseas on deputation and receives compensation while they are away from home, for example, the income made may be subject to tax in both countries. If a DTAA is applicable, the person’s income may not be chargeable to tax as per DTAA and they may request relief while filing their tax return for that fiscal year. 

There may be DTAA requirements that apply to income from such investments if the person is an NRI with investments in India. Concessional rates of tax are occasionally permitted by DTAAs. For instance, a TDS of 30% is applied to interest generated on NRI bank deposits. Tax is subtracted at a rate of 10% to 15%, though, under the DTAAs that India has signed with other nations.

Types of Double Taxation Treaty

The different types of DTAA or double taxation avoidance agreements that can be entered into are as follows, depending on the level of trade and bilateral relations between countries: -

1. Limited Agreements 

Limited DTAAs only cover specific forms of income. The DTAA, for instance, between India and Pakistan is restricted to shipping and aviation profits.

2. Tax Information Exchange Agreements (TIEA)

The OECD (Organization of Economic Co-operation and Development) launched the TIEA programme to tackle detrimental tax behaviours such as corporate tax evasion, international tax evasion, and illicit financial flows. Through the sharing of information about tax evaders, these agreements promote international cooperation and transparency between governments. Bilateral or multilateral TIEAs are both possible.

3. Bilateral Agreements

A bilateral treaty, as the name suggests, is a contract entered into by just two nations. For instance, the DTAA between India and the USA is a bilateral treaty because it was signed by just two nations, India and the USA.

4. Multilateral Treaties

Multilateral treaties, like the APAC (Asia-Pacific) or SAARC (South Asian Association for Regional Cooperation) countries' conventions, are agreements signed by several nations. Several nations have joined a multilateral convention on tax laws, and as a result, the existing Treaties for those nations that are signatories to the Multilateral Convention have been altered.

5. Comprehensive Agreements

All of the income sources listed in any model convention are typically covered by comprehensive DTAAs. The vast majority of the DTAAs that India has signed are of a comprehensive type.

Techniques used in the DTAA to prevent double taxation are-

• Credit Method

In order to calculate the tax burden in the resident country, this technique adds the income taxed in the source country to the total income of the resident country. The residence nation does, however, permit a deduction for taxes paid in the source country from such tax obligations.

1. Full Credit Approach

When tax is paid in the source nation, the resident country automatically grants credit for the tax paid there, without any conditions.

2. Ordinary Credit method

This approach is used in agreements where a credit against the tax due in the resident country is permitted. Only if the income is liable to tax in the foreign jurisdiction may the credit be granted. If the tax paid in the foreign jurisdiction exceeds the tax due in the resident nation, the excess tax is disregarded, and credit is only granted up to the amount of tax due in the resident country. It may also be limited so that only the amount of tax that is owed on each head of income in the country of residence may be deducted from the tax paid in the foreign jurisdiction against that head of income.

• Underlying Credit Method

The profits made by firms are often first taxed at their hands and then again taxed in the hands of the shareholders when the residual profit is handed to shareholders as a dividend after paying corporate tax.

Residents are given credit under this system for both the taxes deducted from the dividend and the taxes paid on the profits used to pay the dividend.

• Tax Sparing Credit Method

With this approach, the resident country receives a credit for the amount of the tax that would have been due in the foreign jurisdiction. When calculating and providing foreign tax credits in the resident country, the tax benefits provided by a certain overseas jurisdiction are assumed to have been paid as a foreign tax.

• Exemption Approach

By using this strategy, income that has previously been subject to tax in the source country (a foreign country) might be partially or entirely exempt from taxation in the resident country. DTAA agreements between nations typically have clauses that specify exception policies.

1. Complete Exemption

In this method, the resident country does not take into account income that is taxed in the source country when determining its taxable income. Example: Under a treaty between States A and B, State B does not take into account income that is taxed in State A.

2. Progressive Exemption

In this system, income taxed in the source nation is not taxed in the country of residence but is instead taken into account for determining the tax rates in the country of residence. Example: Under a treaty between States A and B, income that is subject to tax in State A will not be subject to tax in State B; but, State B will consider the income when determining its tax rates. When the country of residency levies a higher tax rate on income that exceeds a certain level, this is helpful.

List Of Countries And Their DTAA Types And DTAA Rates

COUNTRY	DTAA TYPE	DTAA TDS RATES
Afghanistan	Limited Agreement	-
Albania	Comprehensive Agreement	10%
Argentina	Tax Information Exchange Agreement	-
Armenia	Comprehensive Agreement	10%
Australia	Comprehensive Agreement	15%
Austria	Comprehensive Agreement	10%
Bahamas	Tax Information Exchange Agreement	-
Bahrain	Tax Information Exchange Agreement	-
Bangladesh	Comprehensive AgreementLimited Multilateral Agreement	10%
Belarus	Comprehensive Agreement	10%
Belgium	Comprehensive Agreement	15%
Belize	Tax Information Exchange Agreement	-
Bermuda	Tax Information Exchange Agreement	-
Bhutan	Comprehensive AgreementLimited Multilateral Agreement	10%
Botswana	Comprehensive Agreement	10%
Brazil	Comprehensive Agreement	15%
British Virgin Islands	Tax Information Exchange Agreement	-
Bulgaria	Comprehensive Agreement	15%
Canada	Comprehensive Agreement	15%
Cayman Islands	Tax Information Exchange Agreement	-
China	Comprehensive Agreement	15%
Columbia	Comprehensive Agreement	-
Croatia	Comprehensive Agreement	5%
Cyprus	Comprehensive Agreement	10%
Czech Republic	Comprehensive Agreement	10%
Denmark	Comprehensive Agreement	15%
Egypt	Comprehensive Agreement	10%
Estonia	Comprehensive Agreement	10%
Ethiopia	Limited AgreementComprehensive Agreement	10%
Fiji	Comprehensive Agreement	5%
Finland	Comprehensive Agreement	10%
France	Comprehensive Agreement	10%
Georgia	Comprehensive Agreement	10%
Germany	Comprehensive Agreement	10%
Greece	Comprehensive Agreement	20%
Guernsey	Tax Information Exchange Agreement	-
Hashemite Kingdom of Jordan	Comprehensive Agreement	10%
Hong Kong	Comprehensive Agreement	-
Hungary	Comprehensive Agreement	10%
Iceland	Comprehensive Agreement	10%
Indonesia	Comprehensive Agreement	10%
Iran	Limited Agreement	10%
Ireland	Comprehensive Agreement	10%
Isle of Man	Tax Information Exchange Agreement	-
Israel	Comprehensive Agreement	10%
Italy	Comprehensive Agreement	15%
Japan	Comprehensive Agreement	10%
Kazakhstan	Comprehensive Agreement	10%
Kenya	Comprehensive Agreement	15%
Kuwait	Comprehensive Agreement	10%
Kyrgyz Republic	Comprehensive Agreement	10%
Latvia	Comprehensive Agreement	10%
Lebanon	Limited Agreement	-
Liberia	Tax Information Exchange Agreement	-
Libya	Comprehensive Agreement	20%
Lithuania	Comprehensive Agreement	10%
Luxembourg	Comprehensive Agreement	10%
Macedonia	Comprehensive Agreement	10%
Malaysia	Comprehensive Agreement	10%
Maldives	Tax Information Exchange AgreementLimited Multilateral Agreement	-
Malta	Comprehensive Agreement	10%
Mauritius	Comprehensive Agreement	7.50-10%
Mongolia	Comprehensive Agreement	15%
Montenegro	Comprehensive Agreement	10%
Morocco	Comprehensive Agreement	10%
Mozambique	Comprehensive Agreement	10%
Myanmar	Comprehensive Agreement	10%
Namibia	Comprehensive Agreement	10%
Nepal	Comprehensive AgreementLimited Multilateral Agreement	15%
Netherland	Comprehensive Agreement	10%
New Zealand	Comprehensive Agreement	10%
Norway	Comprehensive Agreement	15%
Oman	Comprehensive Agreement	10%
Pakistan	Limited Multilateral Agreement	-
People's Democratic Republic of Yemen	Limited Agreement	-
Philippines	Comprehensive Agreement	15%
Poland	Comprehensive Agreement	15%
Portuguese Republic	Comprehensive Agreement	10%
Principality of Liechtenstein	Tax Information Exchange Agreement	-
Principality of Monaco	Tax Information Exchange Agreement	-
Qatar	Comprehensive Agreement	10%
Romania	Comprehensive Agreement	15%
Russia	Comprehensive Agreement	10%
Saint Kitts and Nevis	Tax Information Exchange Agreement
Saudi Arabia	Comprehensive Agreement	10%
Serbia	Comprehensive Agreement	5%
Seychelles	Tax Information Exchange Agreement	-
Singapore	Comprehensive Agreement	15%
Slovak Republic	Comprehensive Agreement	-
Slovenia	Comprehensive Agreement	5%
South Africa	Comprehensive Agreement	10%
South Korea	Comprehensive Agreement	15%
Spain	Comprehensive Agreement	15%
Sri Lanka	Comprehensive AgreementLimited Multilateral Agreement	7.50%
Sudan	Comprehensive Agreement	10%
Sweden	Comprehensive Agreement	10%
Swiss Confederation	Comprehensive Agreement	10%
Syrian Arab Republic	Comprehensive Agreement	7.50%
Taipei	Specified Associations Agreement	12.50%
Tajikistan	Comprehensive Agreement	10%
Tanzania	Comprehensive Agreement	12.50%
Thailand	Comprehensive Agreement	25%
Trinidad and Tobago	Comprehensive Agreement	10%
Turkey	Comprehensive Agreement	15%
Turkmenistan	Comprehensive Agreement	10%
United Arab Emirates	Comprehensive Agreement	12.50%
Uganda	Comprehensive Agreement	10%
Ukraine	Comprehensive Agreement	10%
United Kingdom	Comprehensive Agreement	15%
United Mexican States	Comprehensive Agreement	10%
United States of America	Comprehensive Agreement	15%
Uzbekistan	Comprehensive Agreement	15%
Vietnam	Comprehensive Agreement	10%
Zambia	Comprehensive Agreement	10%

For a more detailed list of DTAA rates like DTAA rate between India and USA, DTAA rate between India and UK, DTAA between India and Germany, India- Canada DTAA, India- Netherlands DTAA, India- France DTAA, India- UAE DTAA, India- Singapore DTAA and more, refer to this link.

DTAA Eligibility

Rule 128 of the Income Tax Rules notifies the procedures for obtaining the foreign tax credit. The following list of major rules includes:

An Indian resident may only use the overseas tax credit if he has paid taxes in a foreign nation or another designated region outside of India. This credit may be used in the year that the income responsible for the tax was assessed or made available for taxation in India. The foreign tax credit can be claimed over the course of those years in proportion to the income offered/assessed to tax in India, albeit, if such income is offered/assessed to tax over the course of more than one year

The foreign tax credit shall only be applicable to the amount of tax, surcharge, and cess payable pursuant to Indian tax legislation and shall not be applicable to interest, penalty, or fee;

The taxpayer's disputed foreign tax cannot be eligible for the foreign tax credit. Once the issue has been resolved, the taxpayer must submit the following within six months of the end of the month in which the dispute was fully resolved.

- proof that a disagreement may be resolved

- proof that the contested tax was paid - a statement that no return of the amount is being or will be sought, directly or indirectly

The following documents must be submitted in order to claim the foreign tax credit: The taxpayer must submit the following paperwork in order to claim the international tax credit:

1. A declaration on Form No. 67

2. A certificate or statement obtained from the tax authority of a foreign country, from the person responsible for the deduction of such tax, or from the taxpayer itself, indicating the type of income and the amount of tax deducted or paid by the taxpayer; or a statement signed by the taxpayer and accompanied by the following papers:

1. - Where tax has been paid, a receipt, challan for online payment, or bank counterfoil should be provided.
2.  - Where tax has been deducted, documentation of the deduction should be provided.

According to section 139(1) of the Income Tax Act, these documents must be provided on or before the deadline for submitting an income tax return.

Documents Required to Apply for Tax Relief Under DTAA

An NRI person must timely submit the following documentation to the relevant deductor in order to benefit from the DTAA's provisions.

• Format for self-declaration and indemnity
• self-attested copy of a PAN card
• self-attested passport and visa copies
• Proof of PIO (if applicable)
• Certificate of Tax Residence (TRC)

The Finance Act of 2013 states that unless a person gives a Tax Residency Certificate to the deductor, they are not eligible to claim any benefits of relief under a double taxation avoidance agreement.

Application for Certificate of Residence for Purposes of an Agreement Under Sections 90 and 90A of the Income-tax Act, 1961 (Form 10FA) must be made to the income tax authorities in order to obtain a Tax Residency Certificate. Once the application has been approved, the certificate will be issued in Form 10FB.

How Are DTAA Taxes Calculated?

Calculating double tax relief under section 90 of the Income Tax Act can be done with the following steps-

Step 1: Calculate global income, which is the sum of foreign and Indian income;

Step 2: Determine the amount of income tax due on such a global income;

Step 3: Calculate the average tax rate by dividing the tax amount by the worldwide income;

Step 4: Multiply the average tax rate by the amount of foreign income to arrive at a final sum.

Step 5: Determine the amount of tax paid abroad

The relief must be less than the sum of steps 4 and 5.

Calculating double tax relief under section 91 of the Income Tax Act can be done with the following steps-

Step 1: Determine the amount of tax due in India.

Step 2: The lowest tax rate between the Indian tax rate and the foreign tax rate is considered. 

Step 3: Multiply the income that is subject to two taxes by the lower tax rate. This is the relief provided under Section 91.

Penalties for Tax Fraud, Evasion or Complete Avoidance

Penalties can be levied under the following circumstances-

1. Failure to keep up with necessary paperwork and accounting records

Typically, a fine of 25,000 is imposed. The fine, however, will be equal to 2% of the amount of any overseas transactions or specified domestic transactions the taxpayer has engaged in.

2. Penalty for falsified papers, including phoney invoices

If the income tax authorities discover that the taxpayer's submitted books of accounts include any of the following:

• Generation of sales or purchase invoices without the supply of actual goods or services
• Purchase or sales invoice generated by a person, firm or entity that does not exist.
• Producing forged or fake documentation such as false invoices, certificates, etc.
• Exclusion of any entry that is important for calculating taxable income,

In the aforementioned situations, the assessee may be required to pay a fine equal to the total of these erroneous or omitted entries.

3. Income underreporting

If the income reported by the taxpayer is lower than the income established by the tax authorities, a penalty of 50% of the tax due will be assessed.

If underreporting was caused by inaccurately stated income, the penalty would be doubled to 200% of the tax due.

4. Not Filing Income Tax Return Penalty

The Assessing Officer may impose a fine of INR 5,000 on the taxpayer if the Income Tax Return is not filed in full compliance with the applicable provisions of the Act.

5. Failure to pay taxes on time

The amount of the fine that is owed must be determined by the tax authorities. However, the amount of the penalty will not go beyond the total amount of tax due.

6. Unreported/ Hidden earnings

1. A penalty of 10% is due in cases of unreported income.
2. Where a search process was started on or after January 7, 2012, but prior to December 15, 2016:

• A penalty of 10% of the hidden income will be assessed if undeclared income is revealed during a search and the taxpayer pays the tax, interest, and filing fee.
• A 20% fine of the unreported income will be imposed if it is not declared during the search but is disclosed in the ITR that is filed after the search. - In all other circumstances, a penalty of 60% c will be applied. 

3. Where the search was started on or after December 15, 2016

• If unreported money is revealed during a search and the taxpayer pays the tax, plus interest, and files an ITR, a penalty of 30% of the unreported income will be assessed.
• In all other circumstances, a penalty of 60% will be assessed.

Understanding taxes and finances is a herculean task. It can be particularly difficult to get your head around all the jargon. To make things easier for you, NoBroker has curated a group of finance experts who can help you with all your doubts regarding DTAA. Head over to NoBroker for more helpful information about taxes and finances.

FAQ's