India US Double Tax Avoidance Agreement: What You Need to Know
The India US Double Tax Avoidance Agreement, also known as the Double Taxation Avoidance Agreement (DTAA), is a treaty between India and the United States that aims to prevent individuals and companies from being taxed twice on the same income or profits in both countries.
The agreement was first signed in 1989 and has undergone updates in 1991, 1994, 2001, and 2016. The most recent update, which came into effect on December 17, 2019, further strengthens cooperation between India and the US in the areas of tax administration and enforcement.
What is Double Taxation?
Double taxation occurs when a person or company is taxed on the same income or profits by two different countries. This may happen when a person or company earns income in one country but is considered a resident of another country for tax purposes.
The India US Double Tax Avoidance Agreement aims to prevent double taxation by providing clear guidelines on how income should be taxed and which country has the primary right to tax it.
Key Provisions of the Agreement
The India US Double Tax Avoidance Agreement covers a wide range of income and profits, including:
– Income from employment
– Income from business operations
– Dividends, interest, and royalties
– Gains from the sale of property
– Income from independent personal services
– Income from entertainment and sports activities
– Pensions and annuities
Under the treaty, the taxation of income and profits is generally based on the concept of residency. Individuals and companies who are residents of India or the US are subject to tax in their respective countries on their worldwide income. Non-residents are only subject to tax on income earned in the country where it was earned.
The agreement also provides for the elimination or reduction of double taxation in several ways, including:
– Exemption method – where the income is exempt from tax in one country if it is taxed in the other country.
– Credit method – where the taxpayer is allowed to claim a credit for foreign taxes paid against their tax liability in the other country.
– Tax sparing credit – where the taxpayer is allowed to claim a credit for taxes that would have been payable in the other country but were actually reduced or waived by that country as an incentive for investment or development.
Benefits of the India US Double Tax Avoidance Agreement
The India US Double Tax Avoidance Agreement has several benefits for individuals and companies doing business between India and the US, including:
– Prevention of double taxation – the agreement ensures that individuals and companies are not taxed twice on the same income or profits.
– Clarity and consistency – the agreement provides clear guidelines on how income should be taxed and which country has the primary right to tax it, reducing confusion and discrepancies.
– Investment promotion – the agreement encourages foreign investment by providing tax incentives and exemptions in certain cases.
– Enhanced cooperation – the agreement strengthens cooperation between India and the US in the areas of tax administration and enforcement, helping to combat tax evasion and avoidance.
Conclusion
The India US Double Tax Avoidance Agreement is an essential treaty for individuals and companies doing business between India and the US. By preventing double taxation and providing clear guidelines on how income should be taxed, the agreement helps to promote investment, enhance cooperation, and reduce confusion and discrepancies. For those doing business in both countries, it is essential to understand the provisions and benefits of the agreement to ensure compliance and avoid unnecessary tax liabilities.