The DTAA or Double Taxation Avoidance Agreement is a treaty signed between India and USA to protect the interests of the respective citizens to promote trade and investment by avoiding duplicity of paying taxes.
BENEFITS
1. DTAA Relief in India:
If an Indian resident earns an income that is chargeable to tax in the USA, then such taxpayer can claim a deduction of the amount of tax paid in the USA. However, the total deduction claimed should not exceed the total tax payable on this foreign income in India.
2. DTAA Relief in USA:
A resident of the USA can claim a credit against the US Tax amount of:-
- Income tax paid in India by the resident or on his behalf
- Income tax received by the government of India from an Indian company on the dividend paid to a USA company holding 10% of the voting rights of the Indian company.
3. Capital Gains Tax Relief:
The treaty typically does not provide provisions for the taxation of capital gains. India and USA can tax the gains as they see fit for their respective country as per the individual.
4. Tax Relief:
To reduce the tax calculation, the details under the TR are auto-populated once the taxpayer enters details of income into the scheduled FSI.
5. Business Profits Taxation:
The tax treaty helps in defining the rules for the taxation of business profits, ensuring clarity on how income generated from business activities carried out in both countries should be taxed. This clarity reduces ambiguity and contributes to a more stable and predictable tax environment for businesses.
6. Promotion of Bilateral Trade and Investment:
The India – US trade is on the path to rise two folds, including investments into and outside of both countries. Hence the bilateral trade and investment BITs was created to establish clear limits on investments. BITs provide for the transferability of investment-related funds into and out of a host country without delay and using a market rate of exchange.
INCOMES TAXED UNDER DTAA BETWEEN INDIA-USA
1. Dividend Under DTAA between USA and India:
If a resident company pays a dividend to another country’s residence, the earnings from the dividend are taxable in the receiving country.
Here’s an example – Suppose a US-based company pays a dividend to a shareholder residing in India, then such income will be taxable in India.
The dividend can also be taxed in the paying country if the taxpayer resides in the receiving country. In such a case, tax on dividends should not exceed –
- 15% of the gross amount if the dividend is received by a company having at least 10% of the company’s shares.
- 25% of the gross amount in any other cases.
2. Interest Income Under DTAA with USA:
If interest income arising in a country is paid to a resident of another country, it is charged to tax in the country where the receiver resides. This income can also be taxed in the country where it arises, and the taxpayer is the receiving country’s resident, then the interest cannot be more than –
- 10% of the gross amount if the interest is paid on a loan from a bank or financial institution.
- 15% of the gross amount in other cases.
It’s important to note that tax treaties are subject to updates and amendments, so it’s advisable to consult with tax professionals or legal experts for the latest and most accurate information.
