Double Taxation Avoidance Agreements with special reference to DTAA between India and Singapore
Introduction
The concept of double taxation has been the subject matter engaging the attention of the courts in India and abroad from time to time.[1] The Supreme Court in Laxmipat Singhnia v. CIT[2] has made it clear that “it is a basic rule of the law of taxation that unless otherwise expressly provided income cannot be taxed twice. Again it is not open to the Income Tax Officer, if the income has accrued to the assessee and is liable to be included in the total income of a particular year, to ignore the accrual and thereafter to tax it as the income of another year on the basis of receipt.”
This principle enunciated by the Supreme Court has also been given statutory recognition in the Income Tax Act[3] through Explanation 2 to Section 5 of the Income Tax Act[4]. A separate branch in the law of taxation has been developed in India after a number of DTAAs (Double Taxation Avoidance Agreements) entered into by India with several foreign countries. The reason for these Agreements coming into play was in cases where a person having source of income in India was the resident of another country. For the purpose of DTAA, the income is considered as sourced in a country if the tax-payer is based there. Both the countries would like to tax the income of a person arising from the same transaction, because the desire of a country for taxation can never be satisfied. That‘s where the DTAA comes into play. It may vest right to tax a particular type of income in one of the contesting States. A right to tax a particular income under the DTAA may depend on certain conditions. For example, business income is generally taxable in the source state if the enterprise has a permanent establishment therein. (By source state is meant the state where the income arises or the state the residents of which make payment to the residents of the other contracting state).[5]
Therefore the Double Tax Avoidance Agreement (DTAA) is a tax treaty signed between two or more countries to help taxpayers avoid paying double taxes on the same income. A DTAA becomes applicable in cases where an individual is a resident of one nation, but earns income in another.
DTAAs can be either be comprehensive, encapsulating all income sources, or limited to certain areas, which means taxing of income from shipping, inheritance, air transport, etc. India presently has DTAA with 80+ countries, with plans to sign such treaties with more countries in the years to come. Some of the countries with which it has comprehensive agreements include Australia, Canada, the United Arab Emirates, Germany, Mauritius, Singapore, the United Kingdom and the United States of America.
Double Taxation Avoidance Agreements
These treaties are based on the general principles laid down in the model draft of the Organization for Economic Cooperation and Development (OECD) with suitable modifications as agreed to by the other contracting countries. In case of countries with which India has double taxation avoidance agreements, the tax rates are determined by such agreements. Different modes of avoiding/restriction double taxation have been developed because of different types of income. Certain incomes, for example, income by way of interest may be taxed in both states. While the general rule is that the state of which the assessee is a resident has the right to levy tax, the source State would also have the right to levy tax but at a maximum permissible rate. A Double Taxation Avoidance Agreement may effectively provide for avoidance of tax or for relief against double taxation by providing for grant of credit by the state of residence of the tax paid in the source state. Tax Avoidance Agreements may be confined to a particular type of income for example, aviation income or may be general and cover several/all types of income.
The intent behind a Double Tax Avoidance Agreement is to make a country appear as an attractive investment destination by providing relief on dual taxation. This form of relief is provided by exempting income earned in a foreign country from tax in the resident nation or offering credit to the extent taxes have been paid abroad.
Say, for instance, if an individual is asked to go abroad on deputation and receives payments during the period away from home, the income earned may be subject to tax in both the countries. The individual can claim relief at the time of filing tax return for that financial year, provided there is an applicable DTAA. If the person is an NRI with investments in India, there may be DTAA provisions that apply to income from such investments. In some cases, DTAAs also allow for concessional rates of tax. For instance, interest earned on NRI bank deposits attract TDS of 30%. However, under the DTAAs that India has signed with other countries, tax is deducted at 10-15%.
Need for DTAA
If two countries have an Agreement for Double Tax Avoidance, in that case the possibilities are:
> The income is taxed only in one country.
> The income is exempt in both countries.
> The income is taxed in both countries, but credit for tax paid in one country is given against tax payable in the other country.
In India, The Central Government, acting under Section 90 of the Income Tax Act, has been authorized to enter into double tax avoidance agreements (hereinafter referred to as tax treaties) with other countries.
Types of DTAA
DTAA can be of two types.
1. Comprehensive: Comprehensive DTAAs are those which cover almost all types of incomes covered by any model convention. Many a time a treaty covers wealth tax, gift tax, surtax, Etc.
2. Limited DTAA’s: Limited DTAAs are those which are limited to certain types of incomes only, e.g. DTAA between India and Pakistan is limited to shipping and aircraft profits only.
DTAA versus Income Tax Act, 1961
The most important issue in the interpretation of a DTAA arises in case of its conflict with the provisions of the Income-tax Act, 1961. The problem arises as to which of the two conflicting provisions should prevail over the other. Section 90(2)[6] , which was inserted by the Finance (No. 2) Act, 1991 with retrospective effect from 1-4-1972, makes it clear that in case of DTAA signed by India with another country; those provisions of the Income Tax Act will apply on the assessee which is more beneficial to him. However, if the provisions of the DTAA are more favourable to the assessee then the Income Tax Act will not apply. The rule under section 90(2) was first recognized by the Andhra Pradesh High Court in CIT v. Visakhapatnam Port Trust[7] , which was later on accepted by the Supreme Court in Union of India v. Azadi Bachao Andolan[8]. Indeed the CBDT (Central Board of Direct Taxes) itself had earlier accepted this principle.[9] The Finance (No. 2) Act, 1991, also inserted clause (iii) in section 2(37A) to provide that where tax is deductible at source from payments made to a non-resident the payer could apply the rate as prescribed in the Income Tax Act or the rate applicable under the DTAA whichever was lower. Several other related issues crop-up while keeping in view the above general principle:
> It is well established that the DTAA would prevail over the Act. The question arises as to whether an assessee can opt for being governed by the Agreement in one year and the ITA in the other? However, it may be argued that such option is available.
> The other question that arises is whether an assessee can opt for being governed by the Income Tax Act for the assessment of a particular type of income, say, business income, and by Agreement for another type of income, say, capital gain. However, this must be allowed because the language of section 90(2) applies the Income Tax Act to the extent beneficial to the assessee.
> The next issue arises in case of same type of income derived by the assessee from two different states. The question is whether he can opt for being governed by the Income Tax Act for the income derived from state A; and the provisions of the Agreement for the income derived from state B. For example, an Indian company may have branches (permanent establishments) in Bangladesh and Pakistan. The branch in Bangladesh makes a profit and the Indian company elects to be governed by the Agreement and takes the stand that the profit is assessable only in country where there is a permanent establishment, in line with the view taken by the High Courts and the Supreme Court as referred to hereinafter. The permanent establishment in Pakistan makes a loss and the Indian company desires to set off such business loss against its Indian business income as permissible under section 70[10] of the Act and does not want to be governed by the provisions of the treaty where under the income (which term would include loss) is assessable, as noted above, only in state B. Though the matter cannot be said to be free from all doubt, in my opinion it would be permissible to choose the more beneficial provision ―Treaty wise.
India and Singapore DTAA: Scope
Double Tax Avoidance Agreement between India and Singapore was concluded on 24th January, 1994 and it came into force on 27th May, 1994. The provisions of this agreement were rectified by a treaty signed on June 29, 2005. Its second treaty was signed on June 24, 2011, coming into force on September 1, 2011. This agreement abolishes the double taxation of income between India & Singapore and reduces the overall tax burden of the residents of both countries.
Singapore has entered into double tax treaties with a number of countries, includingIndia. Singapore currently has several DTAAs with other countries. These agreements contribute to the efficiency of Singapore’s tax system. This assignment highlights important provisions of the India-Singapore DTAA, tax applicability, tax rates, the scope of the agreement, and the advantages of the DTAA between India and Singapore. The DTAA between India and Singapore is a tax treaty that avoids the double taxation of income between Singapore and India and reduces the overall tax burden of the residents of both countries.
Without the India-Singapore DTAA , income is liable to be double taxed (i.e., each country may levy its own tax on the same income). This double taxation unfairly penalizes income flows between countries, thereby discouraging trade and commerce.
To address this problem and reduce the overall taxpayer burden, Singapore and India signed the treaty. Therefore any income that’s taxable in both the countries will be taxable only in one country as per the terms of the DTAA.
Types of Taxes Covered under DTAA
The following taxes are covered in the DTAA:
In India
> Income tax, including any surcharge
> Capital gains tax
In Singapore
> Income tax
> Capital gains tax
Key Provisions under India and Singapore DTAA
Income from Immovable Property
Article 6 of the DTAA is divided into 4 clauses under which the first clause states that if the income is derived by a resident of a contracting state from an immovable property located in other contracting state so the income will be taxable in other contracting state.[11]
For example a resident of India if having an income from an immovable property located in Singapore will be taxable in Singapore and not India. Clause 2 of Article 6 states that what constitutes Immovable property depends upon the domestic laws of contracting states. Income derived from the direct use of or letting or any other form of use of immovable property is also part of income from immovable Property and is taxable in the country where property is located.
Taxation of Business Profit
Article 7 deals with taxation of Business income or profits of an enterprise and are taxable in the country in which the enterprise is resident. However, if the enterprise carries out business in the other contracting country through a permanent establishment situated in that contracting country, then the profits or income derived from that permanent establishment alone will be liable to tax in the other contracting country.
Taxation of Shipping and Air Transport Income
Article 8 states that profits derived from the operation of ships or aircraft in international traffic by a resident of one contracting country is liable to tax in that country only (i.e country of residence of the operator).
Profits derived from the transportation by sea or air of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of the ships or aircraft including profits from:
> The sale of tickets for such transportation on behalf of other enterprises;
> The incidental lease of ships or aircraft used in such transportation;
> The use, maintenance or rental of containers (including trailers and related equipment for the transport of containers) in connection with such transportation; and
> Any other activity directly connected with such transportation.
Taxation of Dividends
Article 10 of the DTAA states that if dividend is paid by a resident company of a contracting state to a resident of other contracting state than such income from dividend will be taxable in the state where the receiver of such dividend is resident i.e. in other contracting state. However, such dividends may also be taxed in the source country as follows:
15% of the gross amount of the dividends. Note however, that if the recipient is a company that owns at least 25% of the shares of the company paying the dividends then a reduced tax rate of 10% of the gross amount of the dividends will apply.
Since there is no dividend tax in Singapore, Indian-resident shareholders who derive dividends from a Singapore-resident company or a Malaysian-resident company that has a source of profit in Singapore, are exempt from Singapore tax on the dividend income
Note that the above provisions relating to dividend income do not apply if the recipient of the dividend income:
a) has a permanent establishment in the country in which the company paying the dividend is resident or
b) performs independent personal services from a fixed base that is situated in the country in which the company paying the dividend is resident, and that the holding giving rise to the dividends is effectively connected with that permanent establishment or fixed base. In such cases, the dividend income will be treated as income of the permanent establishment or as income derived from the performance of personal services and will be taxed accordingly.
Dividend income refers to income from shares or other corporate rights that is subject to the same taxation treatment as income from shares.
Taxation of Fees for Technical Services
Article 12 of the agreement states that fees for technical services arising in a contracting country and paid to a resident of the other contracting country may be subject to taxation in the recipient country. However, technical services fees may also be taxed in the source country at 10% of gross amount of fees. Note that the above provisions relating to technical services fees do not apply if the recipient of the fees:
a) has a permanent establishment in the country in which the fees arises or
b) performs independent personal services from a fixed base that is situated in the country in which the fees arises, and that the right, property or contract in respect of which the fees are paid is effectively connected with that permanent establishment or fixed base.
In such cases, the fees will be treated as income of the permanent establishment or as income derived from the performance of personal services and will be taxed accordingly.
Taxation of Directors’ Fees
Article 16 states that directors’ fees or other similar payments received by the resident of one contracting country in his capacity as a director of a company that is resident in the other contracting country will be taxed in that other contracting country. In other words, directors’ fees are liable to taxation in the country in which the company paying the fees is resident.
Taxation of Employment Income
Salaries, wages and other similar remuneration in respect of employment will be subject to tax in the country in which the employment is exercised. However, the employment income will be subject to tax in the recipient’s country of residence and not the contracting country in which the employment is exercised under the following circumstances:
> The individual spends 183 days or less in the country in which employment is exercised for a given fiscal year.
> The remuneration is paid by, or on behalf of, an employer who is not a resident of the country in which the employment is exercised.
> The remuneration is not borne by a permanent establishment or a fixed base in the country in which the employment is exercised.
> The remuneration is derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic.
Taxation of Income Derived by Artists and Sportsmen
Article 17 states that income derived by artistes (i.e. theatre, motion picture, radio or television artiste or a musician) and sportsmen will be taxed in the country in which the activities are performed. However, if the activities are supported wholly or substantially from public funds of the other contracting country and not the country in which the activities are performed then such income will be taxed in that other contracting country.
Taxation of Payments Made to Students and Trainees
Students and business/technical apprentices who are residents of one contracting country and are presently visiting the other contracting country solely for education or training will not be taxed in this other contracting country on:
> Payments received from overseas for their maintenance, education, study, research or training.
> Any amount received as a grant, allowance, or award for the purpose of study, research or training.
> Any remuneration not exceeding US$500 per month or its equivalent in local currency in respect of services performed in connection with study, research or training or for the purposes of maintenance.
Taxation of Payments Made to Teachers and Researchers
Visiting teachers and researchers who are residents of one contracting country and are presently visiting the other contracting country solely for the purpose of teaching or research at an educational institution for a maximum period of up to two years will not be taxed in this other contracting country on any remuneration for such teaching or research. Note that this not apply to income from research, if such research is undertaken primarily for the private benefit of a specific person.
Taxation of Capital Gains
Gains derived by a resident of one contracting country from the alienation of immovable property that is situated in the other contracting country may be taxed in that other country.
Gains derived by an enterprise or resident of one contracting country from the alienation of movable property of its permanent establishment or fixed base that is situated in the other contracting country may be taxed in that other contracting country.
Gains from the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft are taxable in the recipient’s country of residence. Any other gains are taxable in the recipient’s country of residence.
Note: Singapore has abolished capital gains tax.
Double Taxation Relief and Exchange of Information
Article 25 provides for the Double Taxation relief and is divided into six clauses:
First clause gives overriding effect to the DTAA over the domestic laws of the contracting states i.e. if any express provision in Income Tax, 1961 is made contrary to the provision of the DTAA, the agreement will have an overriding effect. Section 90(2) of the Act also states that the assessee has an option to be governed by the agreement in case of conflict.
Second clause directs the Indian Tax authorities that in case the Indian resident has paid the tax on his income derived from Singapore in Singapore than the Indian Tax authorities must grant him deduction in his home country.
Similarly as per fourth clause Singapore offers its residents tax credit relief for double taxation of income. In other words, Indian tax paid in respect of income from sources within India shall be allowed as a credit against Singapore tax payable in respect of that income.
Exchange of Information
As per Notification dated 1-9-2011[12] Article 28 to the DTAA was added which governs the provision related to Exchange of Information.
As per Article 28: The tax authorities of the contracting countries shall exchange tax information as and when necessary. The information exchanged will remain confidential and will only be disclosed to persons (including a court or administrative body) concerned with the assessment, collection enforcement or prosecution in respect of the taxes covered by the DTA.
There will be no disclosure of any trade, business, industrial or professional secret or trade process.
Treaty Shopping
When the law is well settled that the treaty will be given overriding effect on the Income Tax Act, so far it is favourable to the assessee, gives rise to another problem of treaty shopping. It infuses a desire in the assessee to do a transaction through a country which has favourable treaty with India as compared to the general provisions of the Income Tax Act, 1961. Indo-Mauritius treaty, convention with Cyprus and the Netherlands are some good examples in this regard. Suppose there is a favourable provision in the Indo-Mauritius convention as compared to the Indo-US convention, an assessee will naturally be attracted to structure his transaction in such a manner as get benefitted through the Indo-Mauritius convention by incorporating a company in Mauritius, though the person associated with the company may be situated somewhere else. This is actually called as the ―treaty shopping―. This treaty shopping is very often misused by the foreign entities for the purpose of avoiding taxes. For example, over 40% of the total FDI (Foreign Direct Investment) in India comes through the route of Mauritius because under the Indo-Mauritius DTAA capital gains are assessed as per the law of the state of residence of the party.[13] Under the tax law of Mauritius, no tax on capital gains is levied. The result is that all the investment coming via the channel of Mauritius in an Indian company goes un-assessed. Treaty shopping can also be done in cases where the rate of tax in one state is lower as compared to the rate of tax in another state. The Supreme Court dealt with the issue of treaty shopping exclusively in Union of India v. Azadi Bachao Andolan[14] , where it held that if the intention of the DTAA was to preclude a national of third country from taking the benefit out of the favourable terms, then a specific provision to that effect should have been incorporated in it. It is duty of the Parliament to take necessary steps in this regard, and if the limitation is not there in the DTAA then no one can be denied benefit of the favourable tax provisions in the belief that treaty shopping is prohibited. For example, an anti treaty shopping clause has been inserted in Article 24 of the Indo-US DTAA, which permits a non-individual person to avail the benefits of the Agreement only if more than 50% beneficial interest therein is owned by individual resident of a contracting state.[15] In a recent judgment given by the AAR (Authority for Advance Rulings), it was that the Applicant, a tax resident of Mauritius, is not liable to tax in India, under India-Mauritius tax treaty, on the capital gains arising on sale of shares of an Indian company.[16] This ruling also affirms the principles laid down by the Supreme Court in the case of Azadi Bachao Andolan.[17]
Conclusion
The income of an NRI may sometimes be liable to tax in India as well as in the foreign country. To avoid such double taxation, the Government of India has entered into Double Taxation Avoidance (DTA) Agreements with over 70 countries as per Section 90. Hence, an NRI should refer to such DTA Agreement, if necessary. If there is no DTA Agreement of India with Singapore and the income becomes taxable in India as well as in Singapore, then it is provided by Section 91 that unilateral relief at the lower of the two rates of tax will be given in India to a resident in India. Nonetheless, due to the close proximity of the both the countries due to commonalities in history, culture, business, arts, and laws, NRIS’S do possess tactical advantages due to the DTA. Hence due to the overwhelming presence of NRI’s in Singapore, on work passes, Permanent Residence status and the Long-Term Visit Passes (LTVP’s),
Indians have prevailed as a common work force in Singapore. The DTA is certainly a great help for businessmen and working class alike. The income of an NRI may sometimes be liable to tax in India as well as in the foreign country. To avoid such double taxation, the Government of India has entered into Double Taxation Avoidance (DTA) Agreements with over 70 countries as per Section 90. Hence, an NRI should refer to such DTA Agreement, if necessary. If there is no DTA Agreement of India with Singapore and the income becomes taxable in India as well as in Singapore, then it is provided by Section 91 that unilateral relief at the lower of the two rates of tax will be given in India to a resident in India. Nonetheless, due to the close proximity of the both the countries due to commonalities in history, culture, business, arts, and laws, NRIS’S do possess tactical advantages due to the DTA. Hence due to the overwhelming presence of NRI’s in Singapore, on work passes, Permanent Residence status and the Long-Term Visit Passes (LTVP’s), Indians have prevailed as a common work force in Singapore. The DTA is certainly a great help for businessmen and working class alike.
A perusal of the principles laid down by the various decisions while interpreting or giving effect to the different clauses of the DTAA as also the scheme of conferring unilateral relief from these principles, although enunciated in the course of application of a particular agreement or the relevant clauses thereof, would be applicable even to those cases which concern similar clauses of DTAAs between India and other countries. In the end, the ability to arrive at the correct interpretation of a legal provision, which could also mean the interpretation which the Court will ultimately place thereon, is the real art of a lawyer. It depends on his ability to read what is stated, to read between the lines and to read ―through‖ the provision, things which one can do if he has a wide exposure to life as such.
[1] R. Santhanam, Handbook on Double Taxation Avoidance Agreements & Tax Planning for Collaborations, (5th Edn. 2001), at p. 455
[2] (1969) 72 ITR 291 (SC)
[3] The Income Tax Act, 1961.
[4] ibid
[5] https://itatonline.org/interpretation/interpretation17.php
[6] Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.
[7] 144 ITR 146
[8] 263 ITR 706
[9] Circular No. 333 dt. April 2, 1982 reproduced in 137 ITR 1 (st.)
[10] Save as otherwise provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head.
[11] Article 6 of the DTAA.
[12] Notification No. SO 2031(E),
[13] http://www.vccircle.com/500/news/india-mauritius-tax-treaty-pes-must-opt-for-impact-assessment, visited on 6th August, 2011
[14] 263 ITR 706 at pages 746 – 753
[15] Tax Convention with the Republic of India, effective from 1st January, 1991, available at http://www.unclefed.com/ForTaxProfs/Treaties/india.pdf, visited on 7th August, 2011
[16] http://www.pwc.com/in/en/services/Tax/News_Alert/2010/PwC-News-Alert-24-March-2010-E-Trade-MauritiusLtd.jhtml, visited on 6th August, 2011
[17] 263 ITR 706
Author Bio
Please clarify your example for Article 6 of the DTAA, wherein you describe “a resident of India if having an income from an immovable property located in Singapore will be taxable in Singapore and not India”.
When read with Article 25 of the DTAA, one may conclude that the income from immovable property in Singapore will have to be offered to tax in India for the said resident, and the amount of tax paid in Singapore will then get deducted while computing the tax payable in India. Please confirm if this is correct, as it is not explicitly stated in your otherwise excellent article.