Double Taxation can be defined as the levy of taxes on income or capital in the hands of the same tax payer in more than one country, in respect of the same income or capital for the same period.
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 or multiple taxations act as a major determining factor in decisions relating to the 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 taxations. 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 DTAA will provide bilateral relief to the under section 90 of the Income ” Tax Act, 1961 and in the case where there is no DTAA with the country then the assessee can get unilateral relief under Section 91 of the Income Tax Act, 1961.
Objectives of Double Taxation Avoidance Agreements
- To help in avoiding and alleviating the burden of double taxation prevailing in the international arena.
- To clarify and help the taxpayer to know with certainty of his potential tax liability in other countries where he is carrying-on industrial or other activities.
- To ensure that there is no discrimination between foreign taxpayers who has permanent establishment in the source countries and domestic taxpayers of such countries.
- To help in the allocation of taxes between treaty nations and the prevention of tax avoidance and/ tax evasion.
- To ensure that equal and fair treatment of tax payers having different residential status, resolving differences in taxing the income and exchange of information and other details among treaty partners.
Indian Policy with Respect to Double Taxation Avoidance Agreements
The policy adopted by the Indian government in regard to double taxation treaties may be explained as follows:
- Trading with India should be relieved of Indian taxes considerably so as to promote its economic and industrial development.
- There should be coordination of Indian taxation with foreign tax legislation for Indian as well as foreign companies trading with India.
- The agreements are intended to permit the Indian authorities to cooperate with the foreign tax administration.
- Tax treaties are a good compromise between taxation at source and taxation in the country of residence.