Thursday, April 19, 2012

UAE, India fixes double taxation avoidance agreement issues

An amended double taxation avoidance agreement (DTAA) between the UAE and India is likely to plug the loopholes in a previous agreement that enabled tax authorities in India to sometimes unnecessarily go after non-resident businessmen and individuals for alleged tax evasion, say experts.

India and the UAE on Monday signed agreements to amend the double taxation avoidance treaty that will pave the way for greater sharing of tax-related information. The amendments to the treaty were signed during a India-UAE Joint Commission meeting in Abu Dhabi presided over by Minister of Foreign Affairs Shaikh Abdullah Bin Zayed Al Nahyan and his Indian counterpart S.M. Krishna.

The previous DTAA was non-operative in India as individuals residing in the UAE aren't subjected to income tax and, therefore, Indian individuals couldn't furnish proof to the Indian tax authorities of any tax deductions in the UAE.
"The amended DTAA allows for exchange of information about tax matters," Indian ambassador to the UAE, M.K. Lokesh told Gulf News. With the double taxation avoidance treaty being amended, the article on exchange of information has been updated to bring it on par with internationally accepted standards.
This allows for banking information as well as any information without any domestic tax interest to be shared.

Under the Income Tax Act 1961 of India, there are two provisions, Section 90 and Section 91, which provide specific relief to taxpayers to save them from double taxation. Section 90 is for taxpayers who have paid the tax to a country with which India has signed DTAA, while Section 91 provides relief to taxpayers who have paid tax to a country with which India has not signed a DTAA.
When there is a DTAA in place, 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 the UAE selling shares of an Indian company will not pay tax in India. Since there is no capital gains tax in the UAE, the gain will escape all tax.

"Making it easier for investors across globe to buy Indian equities could be one way of bridging the [fiscal] gap and DTAA will prompt more investment flows,