CHAPTER IX - DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) VIS-À-VIS DOMESTIC LAW - Revised Discussion Paper ¡V Direct Tax Code (DTC)

1.0 Chapter -XXIII of the Discussion paper deals with relief from double taxation. Ordinarily, countries follow both residence-based taxation and source-based taxation. However, if two countries tax the same income, one based on the principle of residence and the other based on the principle of source, it could lead to double taxation of the same income. Hence, countries have agreed on certain principles to avoid double taxation and accordingly, entered into Double Taxation Avoidance Agreements (DTAA).

1.1 DTAA provides for certainty on how and when will income of a particular kind be taxed and by which contracting State. The taxation right of each State is defined. If one State has the right to tax a certain income, provision is made for the other State to give tax credit or exemption to that income in order to avoid double taxation.

1.2 The DTC provides that neither a DTAA nor the Code shall have a preferential status by reason of its being a treaty or law. In the case of a conflict between the provisions of a treaty and the provisions of the Code, the one that is later in point of time shall prevail.

2. Apprehensions have been raised that the aforesaid proposal would lead to treaty override and the existing DTAAs could be rendered otiose. This would result in higher rate of taxation on royalty, fees for technical services and interest income etc , which are taxed in the source country at a concessional rate as per the provisions of the DTAA. The uncertainty regarding cost of doing business in India will also affect foreign direct investment. It has been represented that such general treaty override is against the spirit of the Vienna Convention. It may not be possible to restore the preferential status of the DTAAs over domestic law by re-notification of all the existing DTAAs as they are bilateral agreements which cannot be re-notified unilaterally.

3. The current provisions of the Income-tax Act provide that between the domestic law and relevant DTAA, the one which is more beneficial to the taxpayer will apply. However, this is subject to specific exceptions e.g., the taxation of a foreign company at a rate higher than that of a domestic company is not considered as a less favourable charge in respect of the foreign company.

3.1 Similarly it is proposed to provide that between the domestic law and relevant DTAA, the one which is more beneficial to the taxpayer shall apply. However, DTAA will not have preferential status over the domestic law in the following circumstances:-
„h when the General Anti Avoidance Rule is invoked, or
„h when Controlled Foreign Corporation provisions are invoked or
„h when Branch Profits Tax is levied.


3.2 This limited treaty override is in accordance with the internationally accepted principles. Since anti-avoidance rules are part of the domestic legislation and they are not addressed in tax treaties, such limited treaty override will not be in conflict with the DTAAs. Further this will not deprive any taxpayer of any intended tax benefit available under the DTAAs.