Double Tax Agreement between the United Kingdom and India: All You Need to Know

The Double Taxation Avoidance Agreement, commonly known as the DTA, is an agreement between two countries that ensures taxpayers are not taxed twice on the same income or assets in both countries. The United Kingdom (UK) and India have had a DTA since 1993, with several amendments made over the years, to promote economic cooperation between the two countries. In this article, we’ll delve deeper into the UK-India DTA, and highlight its key features.

What is a Double Taxation Avoidance Agreement (DTA)?

As mentioned earlier, a DTA is an agreement between two countries, aimed at avoiding double taxation. The agreement lays down the rules for determining the taxation rights of each country on a particular income or asset. The key features of a DTA include:

1. Residence-based taxation: The residence of a taxpayer is considered to determine the country’s taxation rights under the DTA. If an individual is a resident of one country, their income is taxed in that country.

2. Tax credit method: The DTA provides for the tax credit method, wherein a taxpayer can claim the taxes paid in one country as a credit against the taxes owed in another country.

3. Avoidance of double taxation: The DTA lays down specific rules to avoid double taxation, i.e., the same income or asset being taxed in more than one country.

What are the key features of the UK-India DTA?

The UK and India signed the DTA in 1993, with several amendments made in 2018. The key features of the DTA between the two countries are:

1. Residence-based taxation: The DTA provides that an individual’s residence will determine their tax liability in either country. If an individual is a resident of India, their income will be taxable in India, while if they are a resident of the UK, their income will be taxable in the UK.

2. Avoidance of double taxation: The DTA lays down specific rules to avoid double taxation in both countries, ensuring that the same income or asset is not taxed in both countries.

3. Tax rates: The DTA provides for reduced tax rates on specific types of income, such as royalties, dividends, interest, and capital gains, among others.

4. Permanent establishment: The DTA defines the concept of “permanent establishment” (PE) to avoid the creation of artificial PEs, which may result in double taxation. The DTA provides for specific rules to determine the existence of a PE.

5. Mutual agreement procedure: The DTA provides for a mutual agreement procedure (MAP) to resolve any disputes arising out of its implementation. The MAP involves consultations between the competent authorities of both countries and can be invoked by taxpayers.

Conclusion

The UK-India DTA is an essential instrument for promoting economic cooperation between the two countries. It provides for the avoidance of double taxation and lays down specific rules to determine the taxation rights of each country. The DTA has been amended several times to keep up with the changing business landscape, and is vital for taxpayers engaged in cross-border transactions between the UK and India.