Basically DTAAs are those pacts that seek to eliminate double taxation of income or gains arising in one country and paid to residents or companies of another. In other words, the treaty is devised to ensure that the same income is not taxed twice. In a bid to curb the growing menace of black money, the Government of India has written, under revised tax treaties, some countries to freeze the assets of Indians that have not been declared in India and repatriate the money. It is important to note that India has renegotiated Double Taxation Avoidance Agreements (DTAAs) with 29 out of the 79 countries with which it has such agreements, including the US, Mozambique, Tanzania, Ethiopia, Colombia and Norway. Further, India has also involved into the process of revising DTAAs with Switzerland and Mauritius as well.
The government was amending DTAAs by inserting a clause on information regarding banking sector and also entering into tax information exchange agreements (TIEAs) with several countries, including tax havens. DTAAs have been amended (clause on banking sector has been inserted) with 40 nations and TIEA has been sealed with tax havens like Isle of Man, Bermuda and Bahamas. In absence of a clause on banking sector in DTAAs, the contracting countries were not sharing information in this regard.
The revised pacts include an article on 'Assistance in Collection of Taxes' which allows the two sides to help each other collect taxes due under their respective domestic laws. In some DTAAs, India is including "conservancy" measures, too. The measures include seizure or freezing of assets before the final judgment to ensure they are available whenever the dues are to be collected.
Abuse of DTAAs and round-tripping:
- DTAAs are misused when many of the countries with whom we have avoidance agreements do not tax their residents in the manner we do. For example, Mauritius has exempted taxation on capital gains but India imposes. It is important to note that through Mauritius 41.9 per cent of all FDI since 1991 and bulk of the FIIs flows into India. India loses more than $600 million every year in revenues on account of the DTAA with Mauritius, as per some available estimates. India and Mauritius entered into the DTAA way back in 1982 as part of a strategic relationship in response to the US setting up military base in Diego Garcia in the Indian Ocean.
- The money going out of India, however, is coming back to India for investments, in what is known as "round-tripping". It has been suspected that round-tripping or routing of Indians' illicit money back into the country through the Mauritius route. But in India still we don't have sound estimates regarding round-tripping exist and for this the network of DTAAs and TIEAs to be strengthened to check such practices. And in this regard, the Government has concluded discussions for 11 TIEAs and 13 new DTAAs along with revision of provisions of 10 existing DTAAs during 2010-11. He said foreign tax division of CBDT had been strengthened and a dedicated cell for exchange of information was being set up to work on this agenda.
- It has been suspected that a significant surge in venture capital funds coming from Mauritius in sectors like telecom and real estate, which have been subject matter of close scrutiny for money laundering cases. A total of 154 foreign venture capital investors are registered with SEBI and are permitted to invest in Indian companies and as many as 149 of these entities are based out of Mauritius, three from Singapore and two in Cyprus.
- It has been believed that due to growing popular demand to make public of those having money in bank accounts in locations like Switzerland has also led to a large number of entities shifting their illicit wealth to Mauritius with an aim to ultimately route the funds to India.
- The Direct Taxes Code (DTC) Bill introduced in Parliament and likely to be implemented from April 1, 2012, has proposed to override provisions of DTAAs with regard to certain overseas transactions. Basically, DTC has overriding powers in three areas: General anti-avoidance rules (GAAR), controlled financial operations and branch profit tax. At present, there is no provision in the Income-Tax Act to tax overseas or cross border transactions.
- The newly-approved Directorate of Criminal Investigation (DCI) would collect information about persons and transactions connected with criminal activities and initiate prosecution proceedings against them. The DCI will perform functions in respect to criminal matters having any financial implication punishable as an offense under any direct tax law.
- India has also entered into information exchange agreement with countries such as Switzerland and tax havens such as Bahamas and British Virgin Islands to allow it to receive relevant data on tax evasion in specific cases and to enable the agencies to take the required action.
India signed with Tanzania and Ethiopia
With the intention of making a further leap in its relations with Africa, India recently signed double taxation avoidance agreement with Tanzania and Ethiopia. Double tax avoidance agreement is the deal between two countries by which the tax payer need to pay income tax to one country of which it dues, and by showing the certificates of income tax paid, the second country cannot ask to repay the income tax. Some transactions are like this in which one works part time to different country or work in home country to the foreign country. In such cases the Double taxation avoidance agreement works. Major terms of reference of both the Agreements: The agreement for the avoidance of double taxation and for the prevention of fiscal evasion with respect to taxes on income, signed by India with two of Africa’s major economies consists of following major references. The DTAA provides that business profits will be taxable in the source state if the activities of an enterprise constitute a permanent establishment in the source state. Profits of a construction, assembly or installation projects will be taxed in the state of source if the project continues in that state for more than 270 days (183 days with Ethiopia). Profits derived by an enterprise from the operation of ships or aircrafts in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest and royalties income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed a two-tier 5% or 10% in the case of dividends and 10% in the case of interest and royalties. Capital gains from the scale of shares will be taxable in the country of source. The Agreement further incorporates provisions for effective exchange of information and assistance in collection of taxes between tax authorities of the two countries in line with internationally accepted standards including exchange of banking information and incorporates anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries. The Agreement will provide tax stability to the residents of all the nations and facilitate mutual economic cooperation as well as stimulate the flow of investment, technology and services between India and its African partners. With the latest agreement with Ethiopia and Tanzania, India has now formed DTAAs with 43 countries.
India and Singapore
Signed protocol to amend DTAA
Indian Government has signed a protocol, amending Double Taxation Avoidance Agreement (DTAA) with the Government of Singapore for effective exchange of information in tax matters. It has to be mentioned that both India and Singapore have adopted internationally agreed standard for exchange of information in tax matters and it is likely to ensure greater transparency and governance. The agreed standard for exchange of information in tax matters includes the principles incorporated in the new paragraphs 4 and 5 of OECD Model Article on 'Exchange of Information' and requires exchange of information on request in all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes.