India and Austria Sign a Protocol amending the India-Austria Double Taxation Avoidance Convention

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  • India and Austria signed a Protocol on Monday, amending the existing convention between the two countries for avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income.
  • The Protocol was signed by Sushil Chandra, Chairman, Central board of Direct Taxes (CBDT), on behalf of India and Georg Zehetner, Charge d’ Affaires, Embassy of Austria, on behalf of Austria.
  • The Protocol will broaden the scope of the existing framework of exchange of tax-related information which will help curb tax evasion and tax avoidance between the two countries and will also enable mutual assistance in collection of taxes.

What is DTAA?

  • A DTAA is a tax treaty signed between two or more countries. Its key objective is that tax-payers in these countries can avoid being taxed twice for the same income. A DTAA applies in cases where a tax-payer resides in one country and earns income in another.
  • DTAAs can either be comprehensive to cover all sources of income or be limited to certain areas such as taxing of income from shipping, air transport, inheritance, etc. India has DTAAs with more than eighty countries, of which comprehensive agreements include those with Australia, Canada, Germany, Mauritius, Singapore, UAE, the UK and US.

Why is it important?

  • DTAAs are intended to make a country an attractive investment destination by providing relief on dual taxation. Such relief is provided by exempting income earned abroad from tax in the resident country or providing credit to the extent taxes have already been paid abroad. DTAAs also provide for concessional rates of tax in some cases.
  • For instance, interest on NRI bank deposits attract 30 per cent TDS (tax deduction at source) here. But under the DTAAs that India has signed with several countries, tax is deducted at only 10 to 15 per cent. Many of India’s DTAAs also have lower tax rates for royalty, fee for technical services, etc.
  • Favourable tax treatment for capital gains under certain DTAAs such the one with Mauritius have encouraged a lot of foreign investment into India. Mauritius accounted for $93.65 billion or one-third of the total FDI flows into India between April 2000 and December 2015. It has also remained a favoured route for foreign portfolio investors. But the problem is DTAAs can become an incentive for even legitimate investors to route investments through low-tax regimes to sidestep taxation. This leads to loss of tax revenue for the country.
  • DTAAs basically provide clarity on how certain cross-border transactions will be taxed and this encourages foreign investors to take the plunge.
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