Third Protocol to the Convention between India and New Zealand for the avoidance of double taxation

•  The union cabinet has approved the ratification and entry into force of the third Protocol to the Convention between India and New Zealand for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.

About protocol:

• The Protocol will stimulate the flow of exchange of information between India and New Zealand for tax purposes which will help curb tax evasion and tax avoidance. It will also enable assistance in collection of tax revenue claims between both countries.
• Article 26 on 'Exchange of Information' of the existing Convention has been replaced with a new Article in the Protocol which is in line with the international standard for exchange of information.
• A new Article on ‘Assistance on Collection of Taxes' has been added in the Protocol.
• The Protocol shall enter into force on the date of notification of completion of the procedures required by the respective laws of the two countries for entry into force of the Protocol.
• The Central Government is authorized under section 90 of the Income Tax Act, 1961 to enter into an Agreement with a foreign country or specified territory for exchange of information and recovery of income tax for the prevention of evasion or avoidance of income-tax chargeable under the Income-tax Act, 1961.
• The Convention came into force on 3rd December, 1986. The Convention was amended in 1997 through a First Protocol and in 2000 through a Second Protocol.
• Subsequently, India proposed to further amend the Convention through a Third Protocol to update the Exchange of Information Article as per the international standard and to insert an Article on Assistance in the Collection of taxes.
• About 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.

Analysis:

• 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.
• Favourable tax treatment for capital gains under certain DTAAs such the one with Mauritius has 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.
• For us to prosper, the economy has to grow. And for growth in today’s globalised world, foreign investments are inevitable. DTAAs basically provide clarity on how certain cross-border transactions will be taxed and this encourages foreign investors to take the plunge.
• However, given India’s narrow tax base, it can ill-afford a tax regime that allows big fish to completely evade the tax net, citing a DTAA.

By: Vishal