With the increasing globalization, individuals and businesses often find themselves obligated to pay taxes in multiple countries where they earn income, which can result in double taxation. To tackle this issue, Double Taxation Avoidance Agreements (DTAA) were introduced to prevent double taxation and reduce instances of tax evasion.
Take, for instance, an individual who is a resident of India and has invested in a company situated in the United States of America (USA). Income derived from these investments may be subject to taxation in both countries. However, under the provisions of a Double Taxation Avoidance Agreement (DTAA) between the two nations, the occurrence of double taxation can be averted. Instead, the income will be taxed in either country as per the terms outlined in the agreement.
What is Double Taxation Avoidance Agreements (DTAA)?
DTAA is a treaty signed between two countries aimed at avoiding double taxation. DTAA does not mean that the NRI can completely avoid taxes, but it does mean that the NRI can avoid paying higher taxes in both countries. DTAA also reduces the instances of tax evasion.
These agreements cover various types of income, including employment income, business profits, dividends, interest, royalties, and capital gains, specifying which country has the right to impose taxes on specific types of income.
Minimize Capital Gain Taxes
- The individual must be classified as a Non-Resident.
- They need to obtain a tax residency certificate from the relevant foreign tax authorities.
- Filing Form 10F on the income tax portal is necessary to avail the DTAA benefits.
Article 13(4) of the DTAA of these countries relates to the taxation of gains from selling shares in India.
Conversely, Article 13(5) specifies that transfers other than shares and immovable properties won't be taxed in India.
However, there’s a crucial caveat to consider. Tax treaties are designed to prevent double taxation between the source country and the resident country. When NRIs invest in bonds and mutual funds in India, it can lead to what’s known as double non-taxation, meaning no tax liability in either India or the above-mentioned countries. Such scenarios often invite legal scrutiny, although favorable rulings do exist.
One notable case is the ITAT ruling in the matter of Sri K.E. Faizal, adjudicated by the Cochin bench (ITA No. 423/ Coch/ 2018: A.Y 2012-23). In this case, it was determined that units of equity-oriented mutual funds do not fall under the category of “shares.” Consequently, the short-term capital gains derived from the transfer of such units should be exempt from taxation under Article 13(5) of the India-UAE Double Taxation Avoidance Agreement (DTAA). This ruling provides a lucrative opportunity for investors to optimize their tax obligations by strategically investing in equity-oriented mutual funds.
Author
Ananya K
