India’s Direct Tax Code Versus Double Tax Avoidance Agreements

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By Vikas Srivastava

Jul. 14 – As India moves ahead with the revised version of its new direct tax code, the intricacies of taxation get complicated and this time the battle is between the new revised direct tax code and double tax avoidance agreement.

At present, the DTAA in India supersedes the domestic tax law of the signatory countries (meaning the DTAA between India and the other country shall prevail over the domestic tax law of both the countries). As per a recent judgment by the Supreme Court of India tax treaty is essentially a bargain/negotiation between the two sovereign. Thus in a situation where a tax treaty lays down a special method or mode for computation of tax then the same method or mode for computation of tax shall be followed irrespective of the provisions laid down in the domestic tax laws of the signatory countries.

However, the new revised DTC provides that when there is a conflict between the provisions of DTC and the existing DTA, the provisions of either the DTAA or DTC shall be applicable which are in favor of the taxpayer. This means that the DTAA will not have automatic preferential status, in certain circumstances, over the domestic law. Those circumstance include:

  1. When the General Anti Avoidance Rules are invokes
  2. When Controlled Foreign Corporations are invoked
  3. When Branch Profit tax is levied

Tax experts in India are of the opinion that the above mentioned circumstances have to be reconsidered for certain technical reasons like computation of taxes, tax evasion and tax avoidance.

Vikas Srivastava is the legal associate for Dezan Shira & Associates in Mumbai. He may be contact at mumbai@dezshira.com.