The Purpose Of Taxation

A tax is a governmental assessment or charge upon the property value, transactions such as transfers and sales, licenses granting a right and/or salary of a person or organization.
Due to phenomenal growth in international trade and commerce and increasing interactivity one of the nations, residents of 1 country extend their sphere of economic operations to other countries. Cross-country flow of capital, services and technology may be the order of the day particularly after our country embarked on the way of globalization of economy.

This is generally understood to be the imposition of comparable taxes in two (or more) countries on a single taxpayer according of the identical subject matter as well as for identical periods. Presence of double or multiple taxation acts as a major determining element in decisions associated with location of investment, technology etc. because it affects the profits of a business enterprise. The effort is, therefore, to make sure that heavy tax burden isn’t cast as a result of double or multiple taxation. The item is achieved through the Government getting into agreements with other countries whereby the respective jurisdiction is really identified that a particular earnings are taxed in one country only or, just in case it’s 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 classified as “Double Tax Avoidance Agreements” (DTAA) also referred to as “Tax Treaties”. The statutory authority to enter into such agreements is vested in the Central Government by the provisions contained in Section 90 from the Income Tax Act when it comes to which India has, towards the end of March 2002, applied for 64 agreements of the nature that are comprehensive within the sense they deal with various kinds of income which can be subjected to double taxation.

It’s not unusual for any business or individual that is resident in a single country to make a taxable gain (earnings, profits) in another. This person may find that he’s obliged by domestic laws to pay tax on that gain locally and pay again in the united states in which the gain is made. Since this is inequitable, many nations make bilateral Double Taxation Agreements with one another. In some cases, this requires that tax be paid in the united states of residence and be exempt in the united states that arises. India has such agreements with more than 60 countries. Here, we shall cope 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 supplies 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 become 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, advantages of Indo-Mauritian tax treaty would be available.

This Agreement between India and also the United Arab Emirates (UAE) continues to be dogged by controversy regarding its applicability to individuals residing in UAE, since its inception. In the centre of the controversy may be the issue of whether an individual may be considered a resident of the UAE and take advantage of the provisions of the tax treaty, given the fact that individuals are not susceptible to tax within the UAE at all, and given the fact that an individual has to become resident within the UAE under the tax laws of that state to be able to qualify as a resident of the UAE for the purposes of the tax treaty. A few 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 the Contracting State” means any person who, underneath the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, host to incorporation or any other criterion of a similar nature.

2. Under the Indo-UAE Double Tax Treaty, there will 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 contained in UAE.

4. For that purposes of this Agreement, the term “resident of a Contracting State” means anyone 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 ruling on the subject, the AAR (Authority for Advance Ruling) when it comes to MA Rafique (213 ITR 317) held that the applicant was permitted 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 the following: “That though there is no income-tax or wealth tax on individuals most of the UAE nations, the fact that a comprehensive agreement (tax treaty) was considered necessary regardless of a clear knowledge there wasn’t any such tax on individuals in UAE could only imply that the agreement was intended to let the inflow of funds from Dubai along with other Emirates to India for investment.” Read within this background, Article 13 clearly left it to the UAE to handle the capital gains on movable property realized by all UAE investors. Quite simply, the AAR held that definition of the term ‘resident’ ought to be construed broadly and that the word ‘liable to tax’ doesn’t connote an ‘actual taxation measure’.

2. Pereira Case (1999): Subsequently, a contrary ruling in the case of Cyril Pereira (239 ITR 650) was from the AAR. In this ruling, the term ‘liable to tax’ as laid down within the meaning of a resident was construed narrowly and was equated with the term ‘subject to tax’ or actual payment of tax. As individuals don’t pay tax within the UAE, it was held the applicant Cyril Pereira wasn’t a tax resident from the UAE and was not entitled to the beneficial provisions from the India-UAE tax treaty.