Double Taxation

What Is Double Taxation?


Double taxation is a tax principle referring to income taxes paid twice on the same source of income. It can occur when income is taxed at both the corporate level and personal level.

Double taxation also occurs in international trade or investment when the same income is taxed in two different countries.

A tax treaty between two or more countries to avoid taxing the same income twice is known as Double Taxation Avoidance Agreement (DTAA). This means that there are agreed rates of tax and jurisdiction on specified types of income arising in a country. When a tax-payer resides in one country and earns income in another country, he is covered under DTAA, if those two countries have one in place. DTAAs can be either comprehensive, i.e. covering all types of income or specifically target certain types of income. This depends on the types of businesses/holdings of citizens of one country in another.

What is DTAA?

Let say provide an example:-

Let us take the DTAA between India and Singapore for example. Under this, capital gains of shares in company are taxed based on residence. It helps in curbing revenue loss, avoiding double taxation and streamline the flow of investments.

So, what are the advantages of having such an agreement?

Since there is no dual taxation, countries having DTAAs tend to become lucrative investment hubs. This helps in attracting foreign investment into a country and its subsequent development.

DTAAs are beneficial for NRIs too. If they earn income both in India and the country of current residence, the income earned in India would be taxed both in India and the country of residence. If India has a DTAA in place with the said country, NRIs can either avoid paying tax twice or pay a lower rate of tax.
On a more non-tangible front, DTAAs provide both formal and informal trust between countries, which translates into diplomatic benefits and cordial relationships.

How NRIs Benefit
India’s Income Tax Act spells out who qualifies to be an Indian citizen, but not who is an NRI. Thus, anyone not meeting these standards is generally known as an NRI, provided he or she is born of Indian parents outside India and permanently residing outside India.

However, there are also those who are eligible for NRI status if he or she has been domiciled abroad for 181 days. Once an Indian citizen is deemed an NRI on this count, and if that individual wants to avail of concessions granted to an NRI, his or her original savings bank account will have to be converted to a Non-Resident Ordinary (NRO) account; such people cannot operate a regular savings account.

The NRO account, which can be jointly held with a resident Indian, is also a savings account but specifically designed for NRIs, and which enables them to make transactions of funds originating in India such as rents, dividends, pensions etc.
However, if India has Double Taxation Avoidance Agreement (DTAA) with the NRIs adopted country, TDS will be at the rate proposed in the agreement, which is usually between 7%-15%.
If any of the services mentioned below are taxable in the country of residence for an NRI, he or she can avail of benefit from DTAA to pay tax only once. Broadly, these services are:

Salary earned in India;

Fixed deposits in India;

Saving bank account deposits in India;

Capital gains earned in India;

Salary received in India, an

Real estate property in India.

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