What is ‘Double Taxation’?

 Any income, if subjected to taxation twice is double taxation.  This income could be salary or remuneration for the services rendered.  Or, it could be fees or charges.  Or, it could be interest on deposits/investments made.  Or, it could be profit on sale of fixed assets or movable assets like shares, gold etc. 

Following are some examples of double taxation.

1. Income earned by a citizen in one country, when remitted back to his home country is taxed there again. 
2. Capital gains made by a citizen of one country, by selling his shares of a company located in another country.
3. Profit on sale of immovable properties situated in a foreign country made by a resident citizen.
4. Corporate Profits are subjected to tax and when the same (or a part of it) distributed as dividends to the shareholders is taxed again in their hands as their personal income. (After the Dividends Distribution Tax was introduced in India in 2007, this tax is also paid by the companies themselves and the individual shareholders do not pay any tax on their dividend income).
5. Profit of a Partnership Firm is taxed and the applicable tax is paid by the firm.  Then the retained profit is credited to the individual partners of the firm, in the agreed ratio as mentioned in the ‘Partnership Deed’.  Suppose this money (share of profit) is treated as the personal income of the partners and taxed again, it amounts to double taxation.  However, as per Sec.86 of Income Tax Act, 1961, income/profit subjected to tax in the books of a Partnership Firm and the tax is paid by the firm will not be taxed again, when it is apportioned between the individual partners.

What is ‘Double Taxation Avoidance Agreement’ (DTAA)?

 A country enters into a treaty with another country, in order to encourage enterprise and intellectual capital of both the countries.  This is done through DTAA.  In terms of DTAA, income of a person subjected to taxation in one country (the alien country/country of residence) is not taxed again in another country (home country/country of origin).  This is the most common feature of DTAA. 

 However, in some exceptional cases, the individual is required to pay tax to the country where his income was earned.  This is called ‘Withholding Tax’.   Usually, ‘withholding tax’ is deducted at source.

 Then, the country which received the tax payment issues a ‘Tax Credit’ to the individual and it will be accepted as a valid ‘Tax Credit’ by the country of his residence, at the time of computing the total taxable income of the individual and his tax liability in his home country.

 According to the tax treaty between India and Mauritius, capital gains arising from the sale of shares are taxable in the country of residence of the shareholder and not in the country of residence of the company whose shares have been sold. Therefore, a company resident in Mauritius selling shares of an Indian company will not pay tax in India. Since there is no capital gains tax in Mauritius, the gain will escape tax in both the countries altogether.

 As on date, India has entered into DTAA with 88 countries.

  Why is DTAA most talked about today, in India?

 We are all aware that there are a lot of debates and discussions going on in the print and electronic media during the past few days about repatriation of black money stashed away in foreign banks (tax havens).  Both UPA and the present NDA government have submitted an affidavit to Supreme Court stating that if we disclose the information relating to individuals having bank accounts in countries with which we have DTAA, it will amount to breach of confidentiality of the persons concerned and will be viewed as violation of the terms of DTAA between two countries.  It will hamper further flow of information from these countries.  Then, India cannot succeed in its mission of unearthing huge black money lying abroad.  Mere accusation like “Assets disproportionate to the known sources of income” will not be accepted as a valid reason for sharing the information by the other countries with India.

My (Author's) Understanding is –

1. Tainted money and Ill-gotten wealth stashed away in foreign banks are not covered by the confidentiality clause.
2. Especially when it can be proved that the money was earned through illegal means by tax evasion, corruption, arms trade, terrorism finance etc., the countries are bound to offer full co-operation to the investigating agencies and the countries to find out the true origin of such money.
3. When a person does not respect the laws of the country where he lives and amasses wealth without disclosing it to the law enforcement agencies, he automatically loses the cover of secrecy available to protect his true identity.
4. If it can be proved that the black money lying in the banks could be used for dreadful activities like financing and promoting of terrorism networks across the world, procurement of arms that may be used for overthrowing elected governments, manufacture and trade of psychotropic substances etc., every country will come forward to disclose the true identity of the individuals having deposit accounts.
5. So, once we receive the information from other countries, we must investigate and establish that the money actually belongs to our country and not the individual depositors.  This task is not an easy one and it is the most challenging part of the whole process.  As soon as the charge-sheets are filed before Indian courts, the foreign countries will be prepared to co-operate with us further, so as to reach the logical end i.e. punishing the culprits and confiscating their wealth.