Theincidence of Double taxation is attracted in Indian context,when a Non-resident of India (NRI) is liable for tax in the source country(i.e. India) and also in country of his residence (say USA) on his worldwide incomeas well as on the income accruing or arising or received in India, resulting inDouble taxation on said income.
A Double TaxationAvoidance Agreement (DTAA) is entered by two countries, with the basicobjective to mitigate said double taxation on the same income in both home andsource/host countries (i.e. double taxation of same income) thus promote andfoster economic trade and investment between two countries.
The variousprovisions in relation to DTAA are explained as under:
a)Methods ofproviding relief from Double Taxation:
DTAAmakes provision for elimination on double taxation in one of the followingmanner:
·Exemption Method:Granting exclusive right to tax to one of the countries;
· Concessional Rate of tax:Granting taxing rights to both countries but making a provision for limiting the rate of taxation of each country;
· Tax Credit Method:Granting right to resident of another country to obtain credit for taxes paid in the source country.
TheDTAA covers provisions to grant benefit of relief of taxation for various typesof income, e.g: Interest income, Dividend Income, Salary income, Capital Gains,Business Income, House property income etc.
We explain by an example how the relief is provided underthe DTAA on interest income earned from NRO Bank account held by NRI in India whois Resident of USA.
Indiashall be considered as a “source country” and hence interest income shall be taxablein India. In addition, NRI being a Resident of USA the same interest incomeshall be taxed by USA as a “residence country”. The actual tax liability on NROinterest of Rs. 1 lakh is given below:
| Taxability of income | Particulars | Rate of tax | Amount (in Rs.) |
| Tax in India (source Country) | Concessional Rate prescribed in India-USA DTAA (A) | 15% | 15,000 |
| Tax in USA (Resident Country) | Taxation as per local applicable rates (B) | 30% | 30,000 |
| Benefits granted in the India-USA DTAA | Credit for taxes paid in India as deduction from tax payable in USA (C)=(A)+(B) | __ | 15,000 |
| Total Taxes paid in India and in USA (A)+(C) | 30,000 |
b)Documentsrequired for claiming relief/benefit under DTAA:
A NRI canavail benefits/reliefs under DTAA by timely submission of documents listedbelow to the payer of income:-
1. TaxResidency Certificate (TRC) obtained from Government of Resident country
2. Self-attestedcopy of Passport and Visa
3. Indemnity-cum-declaration(in case of Banks)
4. OCI card(if applicable)
5. Self-attestedcopy of PAN Card (if available)
Mandatory details to be mentioned in the TRC:
1. Name ofthe assessee
2. Status(individual, company, firm etc.) of the assessee
3. Nationalityof the assessee
4. Assessee’stax identification number in the country or specified territory of residence orin case no such number, then a unique number on the basis of which the personis identified by the Government of the country or the specified territory
5. Periodfor which the residential status as mentioned in TRC is applicable
6. Addressof the applicant (outside India) for the period for which TRC is applicable
A TRCcontaining the above details should be duly verified by the Government of the Countryor the Specified Territory of which the NRI claims to be a resident for taxpurposes.
Inaddition to above, as per Notification No. 03/2022,dated 16-07-2022of Central Board of Direct Taxes (CBDT) anyindividual claiming such relief/benefit under DTAA is mandatorily required toFile Form 10F (as provided in the Act) electronically from hisIncome-tax e-filing portal.
Howto obtain a TRC:
ANRI may approach the appropriate Income Tax or Government Authorities of thecountry where he/she resides to obtain a TRC. NRI may check with a CharteredAccountant for the detailed procedure to obtain TRC.
Incase of an Indian resident, he/she may make an application for TRC in Form 10FAto the Income Tax Department. Subsequently on verification of detailsfurnished, the Income Tax Department will issue a TRC to the Indian resident inForm 10FB.
Validity of TRC:
ATRC is typically valid for one financial year and no other document in lieu ofTRC is considered for availing DTAA benefits. Therefore, it is mandatory tosubmit TRC every year in order to avail DTAA benefit without any hassle.
Whomto submit the TRC:
TheTRC so obtained can be submitted to the below authorities:
Ø Option1: Submit to the payer of Income:
The Individualmay consider submitting the copy of TRC to payer of the income, therebyensuring that such payer withholds taxes at such concessional rates or at zerorate as per the benefit/relief mentioned in the DTAA with respective country.
Foreg: Continuing the above example if TRC is submitted to the bank in India, thesaid bank will withhold taxes at concessional rate of 15% as mentioned in DTAAbetween India and USA instead of withholding the taxes at highest rate of 30%as mentioned under the provisions of the Act.
Ø Option2: Submit to Income Tax Department at the time of filing of Tax returns
In case, if TRC is not submitted and tax isnot withheld at concessional rates or at zero rate as per the benefit/reliefmentioned in the DTAA with respective country, then NRI may avail benefit ofDTAA while filing his tax return and claim any refund of excess tax withheld,which is at the discretion of the Income Tax Department and involves time lagin receipt of said refund.
c)MultilateralInstrument (MLI) and its effect on DTAA entered in by India with othercountries:
India hasrecently signed the Multilateral Convention to implement Tax Treaty RelatedMeasures to Prevent Base Erosion and Profit Shifting (commonly referred to asMultilateral Instrument-MLI) along with representatives of many countries andits provisions will be applicable on India’s DTAAs from FY 2020-21 so as to actas a deterrent to tax planning strategies and curb revenue loss through treatyabuse and base erosion and profit shifting strategies.
Updated 01/2024
