India and Cyprus have inked a revised Agreement for Avoidance of Double Taxation and Prevention of Fiscal evasion (DTAA)

•  A revised Agreement between India and Cyprus for the Avoidance of Double Taxation and the Prevention of Fiscal evasion (DTAA) with respect to taxes on income, along with its Protocol, was signed in Nicosia, which will replace the existing DTAA that was signed by two countries on 13th June 1994.
• New DTAA provides for source based taxation of capital gains arising from alienation of shares, instead of residence based taxation provided under the existing DTAA. However, a grandfathering clause has been provided for investments made prior to 1st April, 2017, in respect of which capital gains would continue to be taxed in the country of which taxpayer is a resident.
• The new Agreement provides for Assistance between the two countries for collection of taxes.
• The new Agreement also updates the provisions related to Exchange of Information to accepted international standards, which will enable exchange of banking information and allow the use of such information for purposes other than taxation with the prior approval of the Competent Authorities of the country providing the information.
• The new Agreement expands the scope of ‘permanent establishment’ and reduces the tax rate on royalty in the country from which payments are made to 10% from the existing rate of 15%, in line with the tax rate under Indian tax laws. It also updates the text of other provisions in accordance with the international standards and consistent policy of India in respect of tax treaties.
• Provisions of new DTAA will enter into force after the completion of necessary internal procedures in both countries and is expected to come into effect in India in respect of income derived in fiscal years beginning on or after 1st April, 2017.

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 have 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