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Double Taxation Avoidance Agreements (DTAA)

The Double Tax Avoidance Agreements (DTAA) is essentially bilateral agreements entered into between two countries, in our case, between India and another foreign state. The basic objective is to avoid, taxation of income in both the countries (i.e. Double taxation of same income) and to promote and foster economic trade and investment between the two countries. The advantages of DTAA are as under.

The advantage of DTAA are as under,

  1. Lower Withholding Taxes (Tax Deduction at Source)

  2. Complete Exemption of Income from Taxes

  3. Underlying Tax Credits

  4. Tax Sparing Credits

The Provisions of DTAA override the general provisions of taxing statue of a particular country. It is now well settled that in India the provisions of the DTAA override the provisions of the domestic statute. Moreover, with the insertion of Sec.90 (2) in the Indian Income Tax Act, it is clear that assessee has an option of choosing to be governed either by the provisions of particular DTAA or the provisions of the Income Tax Act, whichever are more beneficial.

The Non Resident can certainly take the benefit of the provisions of DTAA entered into between India and the country, in which he resides, more particularly in respect of Interest Income from NRO account, Government securities, Loans, Fixed Deposits with Companies and dividends etc. This is explained below: -

For the Assessment Year 2008-2009, 

Withholding Tax Rate (TDS) under the Indian Income Tax for Interest Income - 33.99% whereas,

Rate of Tax prescribed in the DTAA with the country where Non Resident resides e.g. Singapore - 15%

Therefore, chargeable rate will be 15 % (Lower of the Two)

Every Non Resident should choose lower of the tax rate prescribed in DTAA with the country where he resides and the tax rate prescribed under the Indian tax laws.

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