Enforcing DTAA needs I­T Act notification: SC

Enforcing DTAA needs I­T Act notification: SC

Subject: Economy

Section: External sector

In News: DTAA can’t be enforced unless notified under Section 90 of Income Tax Act, says SC

Key Points:

• Supreme Court on Thursday held that a Double Taxation Avoidance Agreement (DTAA) cannot be given effect unless notified under the Income Tax Act.
• Court set aside order by Delhi High Court. Section 90 of the Income Tax Act prescribes tax relief under the Double Taxation Avoidance Agreement (DTAA).

Concept: 

Double Taxation Avoidance Agreements (DTAA)  is a treaty signed between two or more countries and is applicable in cases where a taxpayer residing in one country has to earn his/her income from another country.

It is signed between two countries, which, through the elimination of international double taxation, promotes the exchange of goods, services, and investment of capital between the two countries. This implies that there are consented tax rates and jurisdiction on specified kinds of incomes arising in one country to a tax resident of another nation. 

India establishes DTAAs with other countries through Section 90 of the Income Tax Act, 1961. India has DTAAs with more than 80 countries. It is legislated on a reciprocal basis and covers residents of India as well as the residents of the negotiating country. An individual or a corporation not a resident of India or the country with which DTAA is signed cannot claim benefits under DTAAs.

DTAA can either cover all types of income or can target a specific type of income depending upon the types of businesses/holdings of citizens of one country in another. The following categories are covered under the Double Taxation Avoidance Agreements (DTAA):

• services
• salary
• property
• capital gains
• savings/fixed deposit accounts

Benefits:

Sections 90 and 91 under the Income Tax Act 1961 offer specific relief to taxpayers to avoid double taxation.

• Section 90 deals with those provisions involving taxpayers who have paid tax to another country with which India has a DTAA.
• Section 91 is for those countries with which India does not have a DTAA.

Some of the major benefits of Double Taxation Avoidance Agreements (DTAA) are mentioned below:

• Relief on double taxation is provided by the exemption of incomes earned abroad from tax in the resident country or by providing credit to the extent taxes that have already been paid abroad.
• In some cases, the DTAA also provides concessional rates of tax.
• DTAA can become an incentive for even legitimate investors to route investments through low-tax regimes to sidestep taxation.
• DTAA also provides tax certainty to the various investors and businesses of both the countries through the clear allocation of taxing rights between the contracting states by Agreement.

What is the MFN clause?

• This clause provides for lowering of rate of taxation at source on dividends, interest, royalties or fees for technical services (FTS) or restriction of scope of royalty/FTS in the treaty, similar to concession given to another OECD country subsequently.
• In other words the best concession offered to any OECD country will be available to the treaty partner.
• The government argued that India follows the “dualist” practice which means that international treaties and conventions upon their ratification are not automatically assimilated into municipal law (the national legal system) but require enabling legislation.
• Now the government is likely to generate greater tax revenue in such matters but there may be litigation from foreign firms.