Double Taxation Agreements and India

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A tax is a governmental evaluation or cost upon the property worth, transactions corresponding to transfers and gross sales, licenses granting a proper and/or earnings of an individual or group.
Because of phenomenal progress in worldwide commerce and commerce and growing interactivity among the many nations, residents of 1 nation prolong their sphere of enterprise operations to different international locations. Cross-country move of capital, companies and expertise is the order of the day significantly after our nation launched into the trail of globalization of economic system.

That is typically outlined because the imposition of comparable taxes in two (or extra) international locations on the identical taxpayer in respect of the identical material and for equivalent intervals. Presence of double or a number of taxation acts as a significant figuring out consider choices referring to location of funding, expertise and so on. because it impacts the income of a enterprise enterprise. The hassle is, due to this fact, to make sure that heavy tax burden is just not solid because of double or a number of taxation. The article is achieved by the Authorities coming into into agreements with different international locations whereby the respective jurisdiction is so recognized {that a} specific earnings is taxed in a single nation solely or, in case it’s taxed in each the international locations, appropriate aid is offered in a single nation to mitigate the hardship attributable to taxation in one other jurisdiction.

Such agreements are often known as “Double Tax Avoidance Agreements” (DTAA) additionally termed as “Tax Treaties”. The statutory authority to enter into such agreements is vested within the Central Authorities by the provisions contained in Part 90 of the Revenue Tax Act by way of which India has, by the tip of March 2002, entered into 64 agreements of this nature that are complete within the sense that they cope with several types of earnings which can be subjected to double taxation.

It isn’t uncommon for a enterprise or particular person who’s resident in a single nation to make a taxable acquire (earnings, income) in one other. This particular person could discover that he’s obliged by home legal guidelines to pay tax on that acquire domestically and pay once more within the nation by which the acquire was made. Since that is inequitable, many countries make bilateral Double Taxation Agreements with one another. In some circumstances, this requires that tax be paid within the nation of residence and be exempt within the nation by which it arises. India has such agreements with over 60 international locations. Right here, we will cope with its agreements with Mauritius and U.A.E.

A number of the necessary tenets of the India-Mauritius Double Taxation Avoidance Settlement:

1. GBL1 firms can declare advantages of India-Mauritius Double Tax Treaty which gives full tax exemption to Mauritian tax residents in respect of capital features earnings arising on sale of shares of an Indian firm.

2. No capital features tax to be imposed in Mauritius enabling Mauritian tax residents to earn utterly tax free capital features earnings from sale of shares of Indian firm.

3. Indian Supreme Court docket’s ruling in Azadi Bachao Andolan’s case has laid down the clear legislation that the place a Mauritian entity has been issued “tax residency certificates” by Mauritian tax authorities, advantages of Indo-Mauritian tax treaty could be accessible.

This Settlement between India and the United Arab Emirates (UAE) has been dogged by controversy as to its applicability to people residing in UAE, ever since its inception. On the coronary heart of the controversy is the difficulty of whether or not a person might be mentioned to be a resident of the UAE and benefit from the provisions of the tax treaty, given the truth that people should not topic to tax within the UAE in any respect, and given the truth that an individual needs to be resident within the UAE beneath the tax legal guidelines of that state with a view to qualify as a resident of the UAE for the needs of the tax treaty. A number of the necessary tenets of the India-U.A.E Double Taxation Avoidance Settlement:

1. For the needs of this Settlement, the time period “resident of a Contracting State” means any one that, beneath the legal guidelines of that State, is liable to tax therein by purpose of his domicile, residence, place of administration, place of incorporation or another criterion of the same nature.

2. Beneath the Indo-UAE Double Tax Treaty, there shall be no tax imposed in India on capital features earnings earned by a UAE resident from disposal of shares of Indian firm.

3. No company tax and capital features tax current in UAE.

4. For the needs of this Settlement, the time period “resident of a Contracting State” means any one that, beneath the legal guidelines of that State, is liable to tax therein by purpose of his domicile, residence, place of administration, place of incorporation or another criterion of the same nature.

A number of the landmark circumstances on India’s Double Tax Avoidance Treaties with the above international locations:

1. The MA Rafique case (1995): Within the first ever ruling on the topic, the AAR (Authority for Advance Ruling) within the case of MA Rafique (213 ITR 317) held that the applicant was eligible to the advantages of the India-UAE tax treaty and that the capital features, in query, wouldn’t be topic to tax in India. The AAR inter alia noticed as follows: “That although there was no income-tax or wealth tax on people in any of the UAE nations, the truth that a complete settlement (tax treaty) was thought-about crucial despite a transparent information that there was no such tax on people in UAE may solely imply that the settlement was meant to encourage the influx of funds from Dubai and different Emirates to India for funding.” Learn on this background, Article 13 clearly left it to the UAE to cope with the capital features on movable property realized by all UAE buyers. In different phrases, the AAR held that definition of the time period ‘resident’ ought to be construed broadly and that the time period ‘liable to tax’ doesn’t connote an ‘precise taxation measure’.

2. Pereira Case (1999): Subsequently, a opposite ruling within the case of Cyril Pereira (239 ITR 650) was issued by the AAR. On this ruling, the time period ‘liable to tax’ as laid down within the definition of a resident was construed narrowly and was equated with the time period ‘topic to tax’ or precise fee of tax. As people don’t pay tax within the UAE, it was held that the applicant Cyril Pereira was not a tax resident of the UAE and was not entitled to the helpful provisions of the India-UAE tax treaty.

3. Andolan’s Case (2003): Additional, the Supreme Court docket within the case of Azadi Bachao Andolan’s case (263 ITR 706) didn’t settle for the competition that the avoidance of double taxation can come up solely when tax is definitely paid in one of many international locations to the tax treaty. In contrast to the rulings given by the AAR, the Supreme Court docket orders set a precedent. The Supreme Court docket dominated saying it was not persuaded to simply accept the argument that avoidance can come up solely when the tax is paid in one of many contracting states.

4. Abdul Razack A. Meman (2005): All the pieces was again to sq. one, as within the case of Abdul Razaq Memon, a UAE nationwide, the AAR dominated that buyers of the United Arab Emirates need to pay capital features tax on their investments in India. The AAR was of the view that Double Taxation Avoidance Agreements between India and the UAE weren’t helpful for the aim since UAE doesn’t have a tax regime.

To conclude, as mentioned, courts have saved on indulging in a ping-pong of choices, virtually coming throughout as not with the ability to make up their minds on the topic. The significance of international investments for the economic system doesn’t need to be emphasised. As soon as and for all, the authorities need to arrive at a agency choice and cease appearing capricious.

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