Taxation - Tax Treaties: Witholding Tax Rates

The Central Government, acting under Section 90 of the Income Tax Act, has been authorised to enter into Double Tax Avoidance Agreements (tax treaties) with other countries. The object of such agreements is to evolve an equitable basis for the allocation of the right to tax different types of income between the 'source' and 'residence' states ensuring in that process tax neutrality in transactions between residents and non-residents.

A non-resident, under the scheme of income taxation, becomes liable to tax in India in respect of income arising here by virtue of its being the country of source and then again, in his own country in respect of the same income by virtue of the inclusion of such income in the 'total world income' which is the tax base in the country of residence. Tax incidence, therefore, becomes an important factor influencing the non-residents in deciding about the location of their investment, services, technology etc.

Tax treaties serve the purpose of providing protection to tax payers against double taxation and thus preventing the discouragement which taxation may provide in the free flow of international trade, international investment and international transfer of technology. These treaties also aim at preventing discrimination between the tax payers in the international field and providing a reasonable element of legal and fiscal certainty within a legal framework. In addition, such treaties contain provisions for mutual exchange of information and for reducing litigation by providing for mutual assistance procedure.

Treaties signed with countries for avoidation of double taxation

S.No.	Name of the Country	Effective from Assessment Year
1	Australia	1993-94
2	Austria	1963-64
3	Bangladesh	1993-94
4	Belgium	1989-90; 1999-2000	(Revised)
5	Brazil	1994-95
6	Belarus	1999-2000
7	Bulgaria	1997-98
8	Canada	1987-88; 1999-2000	(Revised)
9	China	1996-97
10	Cyprus	1994-95
11	Czechoslovakia	1986-87; 2001-2002	(Revised)
12	Denmark	1991-92
13	Finland	1985-86; 2000-2001	Amending protocol
14	France	1996-97	(Revised)
15	F.R.G	1958-59	(Original)
	F.R.G.	1984-85	(Protocol)
	D.G.R.	1985-86
	F.R.G.	1998-99	(Revised)
16	Greece	1964-65
17	Hungary	1989-90
18	Indonesia	1989-90
19	Israel	1995-96
20	Italy	1997-98	(Revised)
21	Japan	1991-92	(Revised)
22	Jordan	2001-2002
23	Kazakistan	1999-2000
24	Kenya	1985-86
25	Libya	1983-84
26	Malta	1997-98
27	Malaysia	1973-74
28	Muritius	1983-84
29	Mongolia	1995-96
30	Namibia	2000-2001
31	Nepal	1990-91
32	Netherlands	1990-91
33	New Zealand	1988-89
	(1999-2000 amending notification) (2001-2002 Supp. Protocal)
34	Norway	1988-89
35	Oman	1999-2000
36	Philippines	1996-97
37	Poland	1991-92
38	Qatar	2001-2002
39	Romania	1989-90
40	Singapore	1995-96
41	South Africa	1999-2000
42	South Korea	1985-86
43	Spain	1997-98
44	Sri Lanka	1981-82
45	Sweden	1990-91; 1999-2000	(Revised)
46	Switzerland	1996-97
47	Syria	1983-84
48	Tanzania	1983-84
49	Thailand	1988-89
50	Trinidad & Tobago	2001-2002
51	Turkmenistan	1999-2000
52	Turkey	1995-96
53	U.A.E.	1995-96
54	U.A.R.	1970-71
55	U.K.	1995-96	(Revised)
56	U.S.A.	1992-93
57	Russian Federation	2000-2001
58	Uzbekistan	1994-95
59	Vietnam	1997-98
60	Zambia	1979-80

These Agreements follow a near uniform pattern in as much as India has guided itself by the UN model of double tax avoidance agreements. The agreements allocate jurisdiction between the source and residence country. Wherever such jurisdiction is given to both the countries, the agreements prescribe maximum rate of taxation in the source country which is generally lower than the rate of tax under the domestic laws of that country. The double taxation in such cases are avoided by the residence country agreeing to give credit for tax paid in the source country thereby reducing tax payable in the residence country by the amount of tax paid in the source country.

These agreements give the right of taxation in respect of the income of the nature of interest, dividend, royalty and fees for technical services to the country of residence. However, the source country is also given the right but such taxation in the source country has to be limited to the rates prescribed in the agreement. The rate of taxation is on gross receipts without deduction of expenses.

Mode of taxation in different types of income

Capital Gains:

So far as income from capital gains is concerned, gains arising from transfer of immovable properties are taxed in the country where such properties are situated. Gains arising from the transfer of movable properties forming part of the business property of a 'permanent establishment 'or the 'fixed base' is taxed in the country where such permanent establishment or the fixed base is located. Different provisions exist for taxation of capital gains arising from transfer of shares. In a number of agreements the right to tax is given to the State of which the company is resident. In some others, the country of residence of the shareholder has this right and in some others the country of residence of the transferor has the right if the share holding of the transferor is of a prescribed percentage.

So far as the business income is concerned, the source country gets the right only if there is a 'permanent establishment' or a 'fixed place of business' there. Taxation of business income is on net income from business at the rate prescribed in the Finance Acts. Chapter X may be referred to for a discussion on the subject.

Professional Services:

Income derived by rendering of professional services or other activities of independent character are taxable in the country of residence except when the person deriving income from such services has a fixed base in the other country from where such services are performed. Such income is also taxable in the source country if his stay exceeds 183 days in that financial year.

Personal Services:

Income from dependent personal services i.e. from employment is taxed in the country of residence unless the employment is exercised in the other state. Even if the employment is exercised in any other state, the remuneration will be taxed in the country of residence if -

i. the recipient is present in the source State for a period not exceeding 183 days; and

ii. the remuneration is paid by a person who is not a resident of that state; and

iii. the remuneration is not borne by a permanent establishment or a fixed base.

Others:

The agreements also provides for jurisdiction to tax Director's fees, remuneration of persons in Government service, payments received by students and apprentices, income of entertainers and athletes, pensions and social security payments and other incomes. For taxation of income of artists, entertainers sportsman etc, CBDT circular No. 787 dates 10.2.2000 may be referred to.

Unique clauses of agreement

Agreements also contain clauses for non-discrimination of the national of a contracting State in the other State vis-a-vis the nationals of that other State. The fact that higher rates of tax are prescribed for foreign companies in India does not amount to discrimination against the permanent establishment of the nonresident company. This has been made explicit in certain agreements such as one with U.K.

Provisions also exist for mutual agreement procedure which authorises the competent authorities of the two States to resolve any dispute that may arise in the matter of taxation without going through the normal process of appeals etc. provided under the domestic law.

Another important feature of some agreements is the existence of a clause providing for exchange of information between the two contracting States which may be necessary for carrying out the provisions of the agreement or for effective implementations of domestic laws concerning taxes covered by the tax treaty. Information about residents getting payments in other contracting States necessary to be known for proper assessment of total income of such individual is thus facilitated by such agreements.

Favourable Domestic Law

It may sometimes happen that owing to reduction in tax rates under the domestic law taking place after coming into existence of the treaty, the domestic rates become more favourable to the non-residents. Since the objects of the tax treaties is to benefit the non-residents, they have, under such circumstances, the option to be assessed either as per the provisions of the treaty or the domestic law of the land.

Tax Deducted at Source

In order to avoid any demand or refund consequent to assessment and to facilitate the process of assessment, it has been provided that tax shall be deducted at source out of payments to non-residents at the same rate at which the particular income is made taxable under the tax treaties. As a result of amendment made by the Finance Act, 1997 exempting from tax income from dividend declared after 1.6.1997, no deduction is required to be made in respect of such income.

Countries with which no agreement exists

(1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.

(2) If any person who is resident in India in any previous year proves that in respect of his income which accrued or arose to him during that previous year in Pakistan he has paid in that country, by deduction or otherwise, tax payable to the Government under any law for the time being in force in that country relating to taxation of agricultural income, he shall be entitled to a deduction from the Indian income-tax payable by him-

of the amount of the tax paid in Pakistan under any law aforesaid on such income which is liable to tax under this Act also; or
of a sum calculated on that income at the Indian rate of tax; whichever is less.

(3) If any non-resident person is assessed on his share in the income of a registered firm assessed as resident in India in any previous year and such share includes any income accruing or arising outside India during that previous year (and which is not deemed to accrue or arise in India) in a country with which there is no agreement under section 90 for the relief or avoidance of double taxation and he proves that he has paid income-tax by deduction or otherwise under the law in force in that country in respect of the income so included he shall be entitled to a deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income so included at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.

Explanation.-In this section,-

the expression "Indian income-tax" means income-tax charged in accordance with the provisions of this Act;
the expression "Indian rate of tax" means the rate determined by dividing the amount of Indian income-tax after deduction of any relief due under the provisions of this Act but before deduction of any relief due under this Chapter , by the total income;
the expression "rate of tax of the said country" means income-tax and super-tax actually paid in the said country in accordance with the corresponding laws in force in the said country after deduction of all relief due, but before deduction of any relief due in the said country in respect of double taxation, divided by the whole amount of the income as assessed in the said country;
the expression "income-tax" in relation to any country includes any excess profits tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country.

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