India Usa Dtaa

The Double Tax Avoidance Agreement (DTAA) is a treaty signed by two countries. It is signed to make a country an attractive destination and to enable NRIs to avoid having to pay taxes multiple times.

DTAA does not mean that the NRI can completely avoid taxes, but it means that the NRI can avoid paying higher taxes in both countries. DTAA allows an NRI to cut down on their tax implications on the income earned in India. DTAA also reduces the instances of tax evasion.

The Government of India has entered into Double Tax Avoidance Agreements (DTAA) with various countries to prevent any double incidence of taxation for an income, to mitigate the undue imposition of hardship on taxpayers. India and USA have a DTAA that comprehensively addresses and eliminates the incidence of double taxation of income on persons having income in both the countries. Taxpayers should note that only Income Tax is covered under the India USA DTAA. There is no India USA DTAA agreement for GST or other types of indirect taxes.

Introduction

Mr Arjun resident of India works in the United States. In turn, for the work done, Mr Arjun is given some remuneration in the United States. Now, the US Government levies the Federal Income Tax on the income earned in the US.

However, the Indian Government may also charge income tax on the same sum, i.e., the remuneration earned abroad, as Mr Arjun is a resident of India.

To save innocent taxpayers like Mr Arjun from the harmful effects of double taxation, the Governments of two or more countries may enter into an agreement known as the Double Taxation Avoidance Agreement (DTAA). Thus, Governments enter into Double Taxation Avoidance Agreements with the intent of providing relief to the tax-payers:

By either exempting the income earned abroad in its entirety, (In our example, the entire income earned by Mr Arjun in the US will be exempt in India);
By providing credit to the extent of tax already paid in the US (The tax paid by Mr Arjun in the US will be eligible for deduction in India).

The DTAA applies to the residents of the contracting states i.e. India and USA, subject to certain exceptions.

India - USA DTAA Applicability

The India USA DTAA would be applicable to any individual or an estate, a trust, a partnership, a company, any other body of persons, or other taxable entity having income in both India and the USA. The DTAA agreement between India and USA encompasses the following taxes levied by both the countries:

In the United States, the Federal income taxes imposed by the Internal Revenue Code (but excluding the accumulated earnings tax, the personal holding company tax, and social security taxes), and the exercise taxes imposed on insurance premiums paid to foreign insurers and with respect to private foundations. The India USA DTAA also applies to the exercise taxes imposed on insurance premiums paid to foreign insurers to the extent that the risks covered by such premiums are not reinsured with a person not entitled to exemption from such taxes.
In India, the income-tax including any surcharge and surtax. However, the India USA DTAA does not apply to the income tax on undistributed income of companies, imposed under the Income Tax Act.

Residential Status

Resident: A Resident refers to a person who, as per the relevant laws of the Contracting States, i.e., India and the US, is liable to pay tax by reason of domicile, residence, citizenship, place of management, place of incorporation, etc.

If a person is a resident of both contracting states, then residence will be determined as follows:

General Rule: The individual is deemed to be a resident of the state where his permanent home is available

Situation

Deemed to be a resident of the country in which:

A permanent home in both states

Personal and economic relations are closer.

If the above rule is not determinable or no permanent home in either state is there

Habitual abode is present

Habitual abode in both states

He is a National

National of both states or neither of them

Competent Authorities shall determine the residential status by mutual agreement.

Income from Immovable Property

Income derived by a resident from immovable property is to be taxed in the state where the immovable property is situated. Eg: If a US Resident derives rental income from immovable property situated in India, then the rental income will be liable to tax in India. Applicability as per the agreement: For instance, the following points will be considered as income from the immovable property:

Income from agriculture or forestry
Income derived from the direct use, letting or use in any other form of the immovable property
Income from immovable property of an enterprise
Income from Immovable property used for the performance of independent personal services

Dividend

General Rule: Dividend paid by a resident company of a contracting state to a resident of the other contracting state, may be taxed in that other state.
Eg: If a US Company pays a dividend to an Indian Resident shareholder, then the dividend income will be liable to tax in India. Further, USA (The company paying the dividend) also has a right to tax the said dividend in their state. However, if the beneficial shareholder is a resident of India, i.e. a resident of the other contracting state, then the tax so charged shall not exceed:

(a)	The beneficial owner is a company which owns at least 10% of the voting stock of the company paying the dividend	15% of the gross amount of the dividend
(b)	Other Cases	25% of the gross amount of the dividend

Interest

General Rule: Interest arising in a contracting state and paid to a resident of the other contracting state may be taxed in that other State.
As per the DTAA, if interest income arises in India and the amount belongs to a US Resident, then the said amount shall be taxable in the US. However, such interest may be liable to tax in India as per the Indian Income Tax Act (ie the contracting state where the interest has arisen).
Exception: If the beneficial owner of the interest is a resident of the USA (resident of the other contracting state), then the tax charged in India shall not exceed:

(a)	Interest paid on a bank loan (involved in bonafide banking business) or a similar financial institution (including an insurance company)	10% of the gross amount of interest
(b)	In other cases	15% of the gross amount

Capital Gains

Every contracting state may tax capital gains as per the applicable domestic law with an exception to shipping and air transport companies. In other words, generally, capital gains are subject to tax based on the domestic laws of the country. For eg: If a US Resident, say, Miss J, sells an Indian Property, then the property is liable to tax as per the Indian Domestic Laws.

Relief From Double Taxation

In USA: USA shall allow its residents’ credit against the US Tax with respect to:

Income Tax paid to India by or on behalf of such resident
If the US Company owns at least 10% of the voting stock of a company which is a resident of India and the US Company receives dividends, then the income tax received by the Indian Government from the Indian company with respect to the profits from which dividends are paid shall be allowed as a credit.

In India: If an Indian Resident derives income and the same is taxed in the United States, then India shall allow the amount equal to the income tax paid in the United States, as a deduction. However, such deduction shall not exceed the Indian tax paid on the foreign income earned. As per the agreement, income shall be deemed to arise as follows:

1	Income derived by a resident of one contracting state (Eg USA)	Taxed in another contracting state (Eg: India)
2	Income derived by a resident of one contracting state (USA)	Income not taxed in the other contracting state

However, for the purpose of ascertainment of the source of income, the domestic laws of the contracting states shall also apply.

FAQs

DTAA Between India and USA – Reporting in ITR?

Non-residents in India must disclose and pay tax on any income generated outside of India, sometimes known as foreign income.

Foreign income and foreign assets earned by Indian residents should be reported in the Income Tax Return.

Schedule FSI (Foreign Source of Income)?

The taxpayer should include information about foreign income, which is revenue obtained outside of India. Enter the following information:

Country Code – Choose the country where the money is earned.
Identification Number for Taxpayers
Income earned outside of India – Enter the amount earned outside of India.
Outside-of-India taxes – Income tax paid on earnings obtained outside of India
In India, taxes are levied on income received outside the country.
Tax relief is given if the tax paid outside India is less than the tax payable in India, whichever is less.
appropriate DTAA Article – Enter the appropriate DTAA article under which the taxpayer claims tax relief.

Practice area's of B K Goyal & Co LLP

Company Registration Services in major cities of India

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Introduction

India - USA DTAA Applicability

Residential Status

Income from Immovable Property

Relief From Double Taxation

FAQs

DTAA Between India and USA – Reporting in ITR?

Schedule FSI (Foreign Source of Income)?

Practice area's of B K Goyal & Co LLP

Company Registration Services in major cities of India

Most read resources

Related Posts

Practice area's of B K Goyal & Co LLP

Company Registration Services in major cities of India

Most read resources