Context:
Supreme Court held that DTAA cannot be given effect unless notified under Section 90 Income Tax Act which prescribes tax relief under the DTAA.
About DTAA:
- DTAA is a tax treaty signed between two or more countries.
- Objective – Tax-payers in these countries can avoid being taxed twice for the same income.
- It applies in cases where a tax-payer resides in one country and earns income in another.
- Categories covered under DTAA: services, salary, property, capital gains, savings/fixed deposit accounts
- India has DTAA with more than 80 countries such as Australia, Canada, Germany, Mauritius, Singapore, UAE, UK and USA.
- It covers withholding tax on payments such as Dividend, Interest, Royalty etc.
- Benefits –
- Prevent double taxation relief
- Concessional tax rates
- Attractive investment destination
- Loss of tax revenue
Example Scenario
| India modified its Double Taxation Avoidance Agreement (DTAA) with Mauritius to address certain tax loopholes. As of April 2017, Mauritian entities are required to pay capital gains tax when selling shares in Indian companies. Previously, companies could avoid taxation because they were not considered ‘residents’ in India. Furthermore, Mauritius did not tax capital gains for its residents, allowing entities to escape taxation. This tax loophole led to the emergence of many shell entities in Mauritius, which aimed to benefit from investments in India without fulfilling their tax obligations in either country. |
About Base Erosion and Profit Shifting (BEPS):
- A term used to describe tax planning strategies that exploit mismatches and gaps that exist between the tax rules of different jurisdictions.
- An OECD initiative, approved by the G20, to identify ways of providing more standardised tax rules globally.
- Purpose – To minimize the corporation tax that is payable overall, by either making tax profits ‘disappear’ or shift profits to low tax jurisdictions where there is little or no genuine activity.
- In general BEPS strategies are not illegal; rather they take advantage of different tax rules operating in different jurisdictions.
- Significance – Helpful for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises (MNEs).
Source: The Hindu
Previous Year Question
With reference to India’s decision to levy an equalization tax of 6% on online advertisement services offered by non-resident entities, which of the following statements is/are correct?
1. It is introduced as a part of the Income Tax Act.
2. Non-resident entities that offer advertisement services in India can claim a tax credit in their home country under the “Double Taxation Avoidance Agreements”.
Select the correct answer using the code given below:
[UPSC Civil Services Exam – 2018 Prelims]
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: (d)
