Introduction- Double Taxation Avoidance Agreement In India (DTAA)
Double taxation can be defined as the levy of taxes on income / capital in the hands of the same tax payer in more than one country, in respect of the same income or capital for the same period. Double taxation may arise when the jurisdictional connections, used by different countries, overlap or the taxpayer may have connections with more than one country.
The different jurisdictional connections used by countries
Broadly, there are three groups of countries:
Status Jurisdiction- Anglo-Saxon System: Status of the taxpayer is the jurisdictional test. E.g. Citizenship in USA. An American citizen pays US tax on his global income. In the case of India, residence in the country is the jurisdictional test. i.e., if a taxpayer is a resident of India, he will pay tax in India on his world income. In the case of estate duty, the jurisdictional test is domicile. Features of Status jurisdiction:
Jurisdictional connection is the personal status of the taxpayer--rather than the source of his income; In the case of companies, fiscal domicile (location of the seat of management) and not legal domicile (place of incorporation) is the jurisdictional test;
Tax is paid on global income, i.e., income from domestic and foreign sources are taxed (global in character);
Tax rates are applied on the total global income (canon of equity);
Economically advanced countries like US, UK, Germany, Sweden, and Netherlands follow this system.
Source Jurisdiction: European countries follow source jurisdiction. Income, arising or accruing from a source within the country, is subject to taxation. Features of Source Jurisdiction:
The jurisdictional connection is the source of income;
Only income from domestic sources is taxed (territorial rule of jurisdiction);
A schedular system is followed i.e., income from each source in the country is computed and taxed, separately;
France, Latin American countries and some Middle East countries follow this system.
Both Status and Source Jurisdiction: India follows both the methods. However, unlike source jurisdiction countries, income from each source is not taxed separately, though it is computed under each source. The aggregate income from all sources is taxed, applying the principle of progressive taxation, thus satisfying the canon of equity. However, it results in double taxation in many ways. E.g. An American citizen gets income from his investment in India and pays tax in India since his source of income is in India. He also has to pay tax on this income in the US, since he is an American citizen and, thus, is liable to pay tax on his global income.