In February 2011, India and Norway have signed an agreement for the avoidance of double taxation and fiscal evasion with respect to taxes on income and on capital (DTAA). This will replace the existing Convention signed between the two countries on the same subject on December 31, 1986. The revised agreement will bring out greater transparency and openness in both taxation and fiscal matters.

Question: What is Constitutional Status of DTAA?

The constitution of India has conferred the sovereign powers to levy taxes and to enforce collection and recovery thereto on the State under Article 265 by providing that no taxes shall be levied or collected except by authority of law.

  • The power to levy taxes is conferred on the Union of India in respect of matters falling within its domain in Union List of the Constitution.
  • Power to levy taxes, conferred on the State Legislative fall within the scope of State List of schedule VII.
  • Entry (4) of Union List under schedule VII to the Constitution of India empowers the Union of India to enter into treaties and agreements with foreign countries and implement such treaties, agreements and conventions and entry (10) of Union List, dealing with foreign affairs and entry (9) of Union List of Schedule VII covers Diplomats, Councils and trade representation and, therefore, the tax treaties including those for Avoidance of Double Taxation fall within the exclusive domain of the Central Government in view of the Constitutional Authority conferred on it.

The above provision is a bit confusing and to remove any doubt and to avoid any confusion, the Income-Tax Act, 1961 contains explicit statutory provisions to confer on the Central Government the power to enter into Agreements with foreign countries for Avoidance of Double Taxation.

Question: What if India has NO DTAA with a country?

  • The Section 9 of the IT Act provides for unilateral relief in the certain cases and circumstances specified therein.
  • If any person who is resident in India in any previous year proves that in respect of his income accruing or arising in the previous year outside India on which he has paid tax in a country with which there is no Double Taxation Avoidance Agreements, he shall be entitled to the deduction from the Indian Income-tax, a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country whichever is lower. There are also specific provisions in respect of income earned in Pakistan by a resident in India.

The relief of DTAA can be sought only when a person has paid the tax in one of the countries and the same income is liable to be taxes in another country. But if the person is exempt from taxation in one country then he cannot claim the benefit of DTAA to get scot free from paying any tax.

Question: What is difference between DTAA and TIEA?

Both DTAA & TIEA are explained in article 90 of Income Tax Act. It says that the Central Government may enter into an agreement with the Government of any country outside India –

a) for the granting of relief in respect of income on which have been paid both income-tax under this Act and income-tax in that country, or

b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or

c) for exchange of information for the prevention of evasion or avoidance of income- tax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or for recovery of income-tax under this Act and under the corresponding law in force in that country

While, DTAA is entered as per provision 90(a) , the TIEA is signed in as per provision of 90 (c). The Tax Information Exchange Agreements (TIEAs) are signed with the jurisdictions, which are popularly known as ‘tax havens’. Please note that the G20 communiqué has made mandatory the signing of TIEAs in case any country demands this instrument with low or no tax jurisdictions/countries.