The Hindu Business Line : Preferential status for double tax avoidance treaties may go

The code provides that neither a Double Taxation Avoidance Agreement nor the code will have a preferential status by reason of its being a treaty or law.

K. R. Srivats

New Delhi, Aug. 13 The Government proposes to unilaterally adopt a controversial concept whereby non-residents would lose the right to opt for either the provisions of double taxation avoidance treaty or domestic tax law, whichever was beneficial to them.

This could virtually minimise opportunities for treaty shopping, raising tax cost for non-residents with either portfolio investments or direct investments here, say tax experts.

The new Direct Taxes Code, a draft of which was released on Wednesday, provides that neither a Double Taxation Avoidance Agreement nor the code will have a preferential status by reason of its being a treaty or law.

“Therefore, in the case of a conflict between the provisions of a treaty and the provisions of the code, the one that is later in point of time will prevail,” said the discussion paper released along with the code.

Domestic law and treaty

Currently, if the domestic law is less favourable to the treaty, then it could not override the treaty. The domestic law could override the treaty only if the former were to be more favourable to the non-resident assessee. The choice to opt for either treaty benefits or domestic law is left to the non-resident assessee.

“The certainty of being governed by beneficial provisions of tax treaty may not hold good once the new direct taxes code is enacted into law. The tax cost for non-residents is bound to go up. The basic objective seems to be enhancement of source-based taxation,” Mr Aseem Chawla, Partner, Amarchand & Mangaldas, told Business Line.

Although the proposed move may have implications on all the 75 DTAAs that the country has entered into till date, it will particularly be significant in the context of the agreement with Mauritius.

The Indian Government has been unsuccessful in its attempts to renegotiate the DTAA with Mauritius.

Some of the high-value transactions have not been subjected to tax due to the Indo-Mauritius DTAA, tax experts pointed out.

Mr Hitesh Gajaria, Executive Director, KPMG India, said that the proposed move, which he described as an unilateral treaty over-ride, may appear fair in the context of treaty shopping.

Royalty payments

However, it will have unintended consequences in areas such as technology purchases from abroad, he pointed out.

The cost of overseas technology buy may go up for buyers here as they will have to fork out higher tax on royalty.

The code proposes withholding tax of 20 per cent on royalty payments. Royalty payments are generally made on gross basis.

“Most of the recent double taxation avoidance treaties we have entered into provide for withholding of 10 per cent for royalty. If this new direct taxes code comes into play, the treaty benefits will not be available and therefore applicable withholding tax will be 20 per cent for royalty,” Mr Gajaria said.

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