Double Taxation Avoidance Agreements (DTAA) and Tax Residency Certificate Tax(TRC)

The incidence of Double taxation is attracted in Indian context, when a Non-resident of India (NRI) is liable for tax in the source country (i.e. India) and also in country of his residence (say USA) on his worldwide income as well as on the income accruing or arising or received in India, resulting in Double taxation on said income.

A Double Taxation Avoidance Agreement (DTAA) is entered by two countries, with the basic objective to mitigate said double taxation on the same income in both home and source/host countries (i.e. double taxation of same income) thus promote and foster economic trade and investment between two countries. 


The various provisions in relation to DTAA are explained as under:

 

a)   Methods of providing relief from Double Taxation:

 

DTAA makes provision for elimination on double taxation in one of the following manner:


·         Exemption Method: Granting exclusive right to tax to one of the countries;

·    Concessional Rate of tax: Granting taxing rights to both countries but making a provision for limiting the rate of taxation of each country;

·        Tax Credit Method: Granting right to resident of another country to obtain credit for taxes paid in the source country.

 

The DTAA covers provisions to grant benefit of relief of taxation for various types of income, e.g: Interest income, Dividend Income, Salary income, Capital Gains, Business Income, House property income etc.

 

We explain by an example how the relief is provided under the DTAA on interest income earned from NRO Bank account held by NRI in India who is Resident of USA.

 

India shall be considered as a “source country” and hence interest income shall be taxable in India. In addition, NRI being a Resident of USA the same interest income shall be taxed by USA as a “residence country”. The actual tax liability on NRO interest of Rs. 1 lakh is given below:

 

Taxability of income

Particulars

Rate of tax

Amount

(in Rs.)

Tax in India (source Country)

Concessional Rate prescribed in India-USA  DTAA (A)

15%

15,000

Tax in USA  (Resident Country)

Taxation as per local applicable rates (B)

30%

30,000

Benefits granted in the India-USA DTAA

Credit for taxes paid in India as deduction from tax payable in USA (C)=(A)+(B)

__

15,000

 

Total Taxes paid in India and in USA (A)+(C)

 

30,000

 

b)   Documents required for claiming relief/benefit under DTAA:

 

A NRI can avail benefits/reliefs under DTAA by timely submission of documents listed below to the payer of income:-

1.  Tax Residency Certificate (TRC) obtained from Government of Resident country

2.  Self-attested copy of Passport and Visa

3.  Indemnity-cum-declaration (in case of Banks)

4.  OCI card (if applicable)

5.  Self-attested copy of PAN Card (if available)

 

Mandatory details to be mentioned in the TRC:

1.  Name of the assessee

2.  Status (individual, company, firm etc.) of the assessee

3.  Nationality of the assessee

4.  Assessee’s tax identification number in the country or specified territory of residence or in case no such number, then a unique number on the basis of which the person is identified by the Government of the country or the specified territory

5.  Period for which the residential status as mentioned in TRC is applicable

6.  Address of the applicant (outside India) for the period for which TRC is applicable

 

A TRC containing the above details should be duly verified by the Government of the Country or the Specified Territory of which the NRI claims to be a resident for tax purposes.

 

In addition to above, as per Notification No. 03/2022, dated 16-07-2022of Central Board of Direct Taxes (CBDT) any individual claiming such relief/benefit under DTAA is mandatorily required to File Form 10F (as provided in the Act) electronically from his Income-tax e-filing portal.


How to obtain a TRC:

A NRI may approach the appropriate Income Tax or Government Authorities of the country where he/she resides to obtain a TRC. NRI may check with a Chartered Accountant for the detailed procedure to obtain TRC.

 

In case of an Indian resident, he/she may make an application for TRC in Form 10FA to the Income Tax Department. Subsequently on verification of details furnished, the Income Tax Department will issue a TRC to the Indian resident in Form 10FB.

 

Validity of TRC:

A TRC is typically valid for one financial year and no other document in lieu of TRC is considered for availing DTAA benefits. Therefore, it is mandatory to submit TRC every year in order to avail DTAA benefit without any hassle.


Whom to submit the TRC:


The TRC so obtained can be submitted to the below authorities:

 

Ø  Option 1: Submit to the payer of Income:

 

The Individual may consider submitting the copy of TRC to payer of the income, thereby ensuring that such payer withholds taxes at such concessional rates or at zero rate as per the benefit/relief mentioned in the DTAA with respective country.

 

For eg: Continuing the above example if TRC is submitted to the bank in India, the said bank will withhold taxes at concessional rate of 15% as mentioned in DTAA between India and USA instead of withholding the taxes at highest rate of 30% as mentioned under the provisions of the Act.

 

Ø  Option 2: Submit to Income Tax Department at the time of filing of Tax returns

 

In case, if TRC is not submitted and tax is not withheld at concessional rates or at zero rate as per the benefit/relief mentioned in the DTAA with respective country, then NRI may avail benefit of DTAA while filing his tax return and claim any refund of excess tax withheld, which is at the discretion of the Income Tax Department and involves time lag in receipt of said refund.


c)   Multilateral Instrument (MLI) and its effect on DTAA entered in by India with other countries:

 

India has recently signed the Multilateral Convention to implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (commonly referred to as Multilateral Instrument-MLI) along with representatives of many countries and its provisions will be applicable on India’s DTAAs from FY 2020-21 so as to act as a deterrent to tax planning strategies and curb revenue loss through treaty abuse and base erosion and profit shifting strategies.

Updated 01/2024