Double Taxation Avoidance Agreement (DTAA)
Context:
India and Bahrain have agreed to develop a common understanding to commence Double Taxation Avoidance Agreement (DTAA) negotiations
The stated goal of this agreement is to eliminate double taxation, provide tax certainty, and promote trade and investment between the two countries
What is a DTAA?
A DTAA is a tax treaty or agreement between two or more countries to ensure that the income of non-residents is not taxed both in their country of origin and in the country where they live.
The main purpose is to resolve issues of income taxability and increase transparency to avoid tax evasion.
It makes a country attractive for investments by offering tax benefits
India currently has DTAAs in force with more than 85 countries.
These include the UK, USA, Canada, and Australia
DTAA under the Income Tax Act, 1961
The Income Tax Act provides relief from double taxation under two sections:
Section 90: deals with provisions for taxpayers who have paid tax in a country with which India has a DTAA
Section 91: provides relief for taxpayers who have paid tax in a country with which India does not have a DTAA
DTAA Application
A DTAA generally applies to taxes on income, which can include
Salary
Services
Property
Capital gains
Savings and fixed deposit accounts
Disadvantage:
A major disadvantage associated with DTAAs is Treaty Shopping
Where national or a resident of third country seeks to obtain benefit double tax avoidance agreement (DTAA) between two or multiple countries by impersonating as a company or other entity in one of the countries.
Many companies set up holding structures in tax-friendly jurisdictions such as Mauritius, Singapore, or the Netherlands to benefit from India’s DTAA agreements. This allows them to reduce capital gains tax, dividend withholding tax, and other liabilities.
Anti-treaty shopping measures by India:
Limitation of Benefits (LOB) clause in its tax treaties.
GAAR (2017)
Adoption of Multilateral Instrument (MLI) provisions under BEPS.