A tax is a governmental assessment or charge upon the property value, transactions such as transfers and sales, licenses granting a right and/or income of a person or organization.
Due to phenomenal growth in international trade and commerce and increasing interactivity among the nations, residents of one country extend their sphere of business operations to other countries. Cross-country flow of capital, services and technology is the order of the day particularly after our country embarked on the path of globalization of economy.
This is generally defined as the imposition of comparable taxes in two (or more) countries on the same taxpayer in respect of the same subject matter and for identical periods. Presence of double or multiple taxation acts as a major determining factor in decisions relating to location of investment, technology etc. as it affects the profits of a business enterprise. The effort is, therefore, to ensure that heavy tax burden is not cast as a result of double or multiple taxation. The object is achieved by the Government entering into agreements with other countries whereby the respective jurisdiction is so identified that a particular income is taxed in one country only or, in case it is taxed in both the countries, suitable relief is provided in one country to mitigate the hardship caused by taxation in another jurisdiction.
Such agreements are known as “Double Tax Avoidance Agreements” (DTAA) also termed as “Tax Treaties”. The statutory authority to enter into such agreements is vested in the Central Government by the provisions contained in Section 90 of the Income Tax Act in terms of which India has, by the end of March 2002, entered into 64 agreements of this nature which are comprehensive in the sense that they deal with different types of income which may be subjected to double taxation.
It is not unusual for a business or individual who is resident in one country to make a taxable gain (earnings, profits) in another. This person may find that he is obliged by domestic laws to pay tax on that gain locally and pay again in the country in which the gain was made. Since this is inequitable, many nations make bilateral Double Taxation Agreements with each other. In some cases, this requires that tax be paid in the country of residence and be exempt in the country in which it arises. India has such agreements with over 60 countries. Here, we shall deal with its agreements with Mauritius and U.A.E.
Some of the important tenets of the India-Mauritius Double Taxation Avoidance Agreement:
1. GBL1 companies can claim benefits of India-Mauritius Double Tax Treaty which provides complete tax exemption to Mauritian tax residents in respect of capital gains income arising on sale of shares of an Indian company.
2. No capital gains tax to be imposed in Mauritius enabling Mauritian tax residents to earn completely tax free capital gains income from sale of shares of Indian company.
3. Indian Supreme Court’s ruling in Azadi Bachao Andolan’s case has laid down the clear law that where a Mauritian entity has been issued “tax residency certificate” by Mauritian tax authorities, benefits of Indo-Mauritian tax treaty would be available.
This Agreement between India and the United Arab Emirates (UAE) has been dogged by controversy as to its applicability to individuals residing in UAE, ever since its inception. At the heart of the controversy is the issue of whether an individual can be said to be a resident of the UAE and take advantage of the provisions of the tax treaty, given the fact that individuals are not subject to tax in the UAE at all, and given the fact that a person has to be resident in the UAE under the tax laws of that state in order to qualify as a resident of the UAE for the purposes of the tax treaty. Some of the important tenets of the India-U.A.E Double Taxation Avoidance Agreement:
1. For the purposes of this Agreement, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation or any other criterion of a similar nature.
2. Under the Indo-UAE Double Tax Treaty, there shall be no tax imposed in India on capital gains income earned by a UAE resident from disposal of shares of Indian company.
3. No corporate tax and capital gains tax present in UAE.
4. For the purposes of this Agreement, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation or any other criterion of a similar nature.
Some of the landmark cases on India’s Double Tax Avoidance Treaties with the above countries:
1. The MA Rafique case (1995): In the first ever ruling on the subject, the AAR (Authority for Advance Ruling) in the case of MA Rafique (213 ITR 317) held that the applicant was eligible to the benefits of the India-UAE tax treaty and that the capital gains, in question, would not be subject to tax in India. The AAR inter alia observed as follows: “That though there was no income-tax or wealth tax on individuals in any of the UAE nations, the fact that a comprehensive agreement (tax treaty) was considered necessary in spite of a clear knowledge that there was no such tax on individuals in UAE could only mean that the agreement was intended to encourage the inflow of funds from Dubai and other Emirates to India for investment.” Read in this background, Article 13 clearly left it to the UAE to deal with the capital gains on movable property realized by all UAE investors. In other words, the AAR held that definition of the term ‘resident’ should be construed broadly and that the term ‘liable to tax’ does not connote an ‘actual taxation measure’.
2. Pereira Case (1999): Subsequently, a contrary ruling in the case of Cyril Pereira (239 ITR 650) was issued by the AAR. In this ruling, the term ‘liable to tax’ as laid down in the definition of a resident was construed narrowly and was equated with the term ‘subject to tax’ or actual payment of tax. As individuals do not pay tax in the UAE, it was held that the applicant Cyril Pereira was not a tax resident of the UAE and was not entitled to the beneficial provisions of the India-UAE tax treaty.
3. Andolan’s Case (2003): Further, the Supreme Court in the case of Azadi Bachao Andolan’s case (263 ITR 706) did not accept the contention that the avoidance of double taxation can arise only when tax is actually paid in one of the countries to the tax treaty. Unlike the rulings given by the AAR, the Supreme Court orders set a precedent. The Supreme Court ruled saying it was not persuaded to accept the argument that avoidance can arise only when the tax is paid in one of the contracting states.
4. Abdul Razack A. Meman (2005): Everything was back to square one, as in the case of Abdul Razaq Memon, a UAE national, the AAR ruled that investors of the United Arab Emirates have to pay capital gains tax on their investments in India. The AAR was of the view that Double Taxation Avoidance Agreements between India and the UAE were not useful for the purpose since UAE does not have a tax regime.
To conclude, as discussed, courts have kept on indulging in a ping-pong of decisions, almost coming across as not being able to make up their minds on the subject. The importance of foreign investments for the economy does not have to be emphasized. Once and for all, the authorities have to arrive at a firm decision and stop acting capricious.