Double Taxation Avoidance Agreements

Double taxation is attracted when a NRI is liable for tax in country of his residence (say USA) on his worldwide income as well as in the source country (say India) on the income accruing or arising in India.

Double taxation on same income is attracted on account of the tax levied by the country in which income is earned (commonly known as "source country") and if person who has earned the income is resident of another country then the tax is levied by home state (commonly known as "residence country"). For e.g. a NRI is resident of USA and has a source of income in India, the NRI is liable to pay tax on income in the source country i.e. India and also in the residence country i.e. USA.

A Double Taxation Avoidance Agreement (DTAA) is executed by both countries to mitigate the double or larger tax in the above situation and also to promote and foster economic trade and investment between the two countries.

DTAA makes provision for elimination on double taxation in one of the following manner:

• Granting exclusive right to tax to one of the countries;
• Granting taxing rights to both countries but making a provision for limiting the rate of taxation of each country;
• Granting right to resident of another country to obtain credit for taxes paid in the source country.

The DTAA covers provisions to grant benefit of relief of taxation of various types of income, e.g.

• Interest income
• Dividend income
• Employment earnings
• Capital gains
• Consultancy and royalties income
• Business income
• Any other type of income

We explain by an example how the relief is provided under the DTAA on interest income earned from NRO Bank account held by NRI in India who is Resident of USA.

India shall be considered as a "source country" and hence interest income shall be taxable in India. In addition, NRI being a Resident of USA the same interest income shall be taxed by USA as a "residence country". The actual tax liability on NRO interest of Rs. 1 lakh is given below:

As explained above the total tax payable by the NRI in India and USA is Rs.30,000 only.

It is important to state that for taking benefit of concessional rate prescribed in the India-USA DTAA at 15%, NRI is required to submit a Tax Residency Certificate (TRC) to the Bank or the Income Tax Department. This is because the normal rate of tax deduction is at the rate of 30% and hence the requirement. However, in case, if TRC is not submitted and tax is not withheld at 15% but at the rate of 30%, then NRI may avail benefit of DTAA 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 lag in receipt of said refund.

The procedure for availing the benefits under DTAA is as follows:

How to avail benefits under DTAA:

A NRI can avail benefits under DTAA by timely submission of documents listed below to the payer of income:-

• Tax Residency Certificate (TRC) obtained from Government of home country
• Self-attested copy of Passport and Visa
• Indemnity-cum-declaration (in case of Banks)
• OCI card (if applicable)
• Self-attested copy of PAN Card (if available)

Mandatory details to be mentioned in the TRC:

• Name of the assessee
• Status (individual, company, firm etc.) of the assessee
• Nationality of the assessee
• Assessee's tax identification number in the country or specified territory of residence or in case no such number, then a unique number on the basis of which the person is identified by the Government of the country or the specified territory
• Period for which the residential status as mentioned in TRC is applicable
• Address of the applicant (outside India) for the period for which TRC is applicable

A TRC containing the above details should be duly verified by the Government of the Country or the Specified Territory of which the NRI claims to be a resident for tax purposes.

It is important to note that, if any, of details mentioned above in point no. 1 to 6 is not available in the TRC, the NRI has to additionally provide Form 10F (as provided in the Act) to the payer of income along with the TRC.

The procedure for obtaining TRC is explained below:

How to obtain a TRC

A NRI may approach the appropriate Income Tax or Government Authorities of the country where he/she resides to obtain a TRC. NRI may check with a Chartered Accountant for the detailed procedure to obtain TRC.

An Indian resident may make an application for TRC in Form 10FA to the Income Tax Department. Subsequently on verification of details furnished, the Income Tax Department will issue a TRC to the Indian resident in Form 10FB.

Validity of TRC

A TRC is typically valid for one financial year and no other document in lieu of TRC is considered for availing DTAA benefits. Therefore, it is mandatory to submit TRC every year in order to avail DTAA benefit without any hassles. - by A M B JAIN & CO.