In our previous paper, we have discussed the tax ability of Non-Residents under Indian Income Tax Act. In this paper, we are discussing how tax treaties assist avoiding double tax on the same income; one, at source Country and another at resident Country.
In the resident Country, tax is an obligation, while in source Country, tax is a cost. Tax treaties assist the tax payers to avoid the hardship to pay tax twice on the same income. Therefore, tax treaties are the agreement between two Countries that covers tax aspects on cross border transaction between them and thereby provides mechanism to avoid double tax on such transactions.
As treaties are entered into to promote international trade based on the negotiations and bargains to seek concessions by each Country primarily for avoidance of double taxation. Therefore, the non-resident tax payers are given the legal right to choose between Indian Tax provisions and treaty provisions; obviously he will choose whichever is beneficial to him.
Though the treaty making is done through bilateral negotiations, but for the sake of standardization of treaty draft, it is based on Model Conventions enumerated by international organisations.
Beyond any doubt, a bilateral tax treaty shall always benefits the tax payers who are the residents of these two Countries. Broadly, treaty benefits are of two type; one, division of taxing rights between them based on the nature of income or giving taxing rights to both, lower rate of tax in source Country and normal rate of tax in resident Country with tax credit of taxes paid in source Country.
It is extremely simple to apply tax treaty if we follow these simple steps:
Notwithstanding of the above, the interpretation of tax laws and tax treaties turn the simplicity into complexity. So, in forthcoming papers, we shall address all the complexities one by one.
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