Understanding the DTAA Between India and the UK

The Double Tax Avoidance Agreement (DTAA) between India and the UK is a vital initiative created by the Indian government. It is a written agreement signed by both countries that aims to protect individuals staying in India, the UK, or both nations from facing the problem of double taxation. The agreement is made to promote cross-border investments, alleviate double taxation, and improve economic collaboration between the two countries. NRIs and businesses operating in both nations can benefit by understanding this agreement and reducing tax liabilities.

The India-UK DTAA allows an individual to claim taxes that he paid in one country as a credit against taxes due in another country, ensuring that taxes are ultimately paid only in one country. This agreement offers various forms of tax relief, and India has signed similar agreements with approximately 100 countries around the globe, including India-Singapore DTAA and India-USA DTAA. Given the importance of this agreement, it is vital to understand it to enjoy its benefits. In this blog, we will learn everything about the DTAA (Double Tax Avoidance Agreement) between India and the UK. This blog will help you understand the details, using which an NRI can avoid paying tax twice for the same income.

What is the Double Tax Avoidance Agreement Between the UK and India?

The DTAA between India and the UK was first signed on the 26th of October, 1993, introducing rules to avoid double taxation on income abroad in either nation. It is an agreement signed by both countries, stating the rules, regulations, and provisions of taxation between the contracting countries. This agreement helps an NRI who resides in the UK and earns income, thereby protecting them from double taxation. Individuals who stay in the UK for at least 182 days in a financial year will be considered NRIs, and they will be eligible to benefit from tax exemption under this agreement. The DTAA contains 31 articles as well as a few subsections explaining the rules and regulations regarding tax benefits available to taxpayers from either country.

Importance of the India-UK DTAA for Both Nations

The DTAA agreement holds great importance for both countries for the following reasons:

• Avoiding Tax Evasion: It addresses the tax evasion concern by providing fair tax opportunities for NRIs to pay taxes legitimately.
• Smooth Functioning of Firms: The agreement allows partnership firms to operate smoothly in both the UK and India without the stress of paying taxes twice.
• Fair Taxation: It promotes a fair taxation system for taxpayers, ensuring that individuals earning income internationally are taxed fairly and appropriately, depending on the provisions.
• Tax Deducted at Source: This agreement allows tax benefits like relief on tax deducted at source, tax credit in either of the countries, or tax credits.
• Global Employment Options: It increases multinational employment opportunities in India, encouraging participation in the global business landscape.
• Tax Relief: Organizations based in both nations can benefit from tax relief under Section 90A of the Income Tax Act, 1961.
• Benefit for Students: Indian students staying in the UK can also claim tax advantages for their earnings under Article 21 of the DTAA for the first five years of their stay.

Taxes Covered Under the India-UK DTAA

The DTAA between India and the UK applies to various types of taxes. The following are the taxes covered under the India-UK DTAA:

Applicable taxes in the United Kingdom under the DTAA are:

• Income Tax
• Corporate Taxes
• Capital gains taxes
• Petroleum revenue taxes

Applicable taxes that fall under the "Indian Tax" under the DTAA are:

• Income tax, along with any fees or surcharges.
• Taxes of a similar nature were introduced late within the scope of the India-UK DTAA.

Taxation of Dividends Under DTAA

Under the India-UK DTAA, recipients of dividends benefit from a reduced tax rate on dividend income received from UK-based companies.

• Article 11 of the DTAA between India and the UK says that the rate of the TDS on the dividend income must not exceed 15% of the income earned directly or indirectly from an immovable property. This 15% tax applies to technical services and royalties as well.
• The TDS rate is set at 10% in most other cases of dividend income.
• An Indian tax resident can avail a tax relief of 15% on their dividend income and can also claim a tax credit of up to 15% according to Article 12(2).
• A maximum TDS deduction of 15% can be claimed on interest income earned in the UK by providing their residency in India.
• Article 24 of the India-UK DTAA is released from the law, allowing the taxpayer to claim a credit of the tax which isn't paid but is restricted for up to 10 years from its first accrued date.

Capital Gains Taxation Under the DTAA

All capital gains are also subject to taxation under the India-UK DTAA, as mentioned in Article 14. Capital gains that have been realized in any of the contracting states will be taxed as per the country's domestic laws, except for gains mentioned in Articles 8 and 9. These articles deal with the capital gains received from air transportation and shipping-related contractual income, which are eligible for tax relief under the DTAA.

Even though there are no limitations on the maximum capital gains tax payable in the country where the gain arises, it can be credited according to the domestic laws of the country. For example, if an Indian taxpayer sells shares in the UK, the gains will be taxed in the UK as per its laws, and they can claim a foreign tax credit in India.

Personal or Professional Service Taxation Under DTAA

According to Article 15 of the India-UK DTAA, personal income is also taxable. Any income generated in either nation is subject to taxes according to domestic laws only if an individual is present for more than a period of 90 days and maintains a fixed base for conducting the activities. Also, foreign tax credits in India will apply.

Conclusion

In this modern world, learning about the DTAA between India-UK is vital as it serves as an important financial instrument that provides a fair taxation system for both countries. It not only prevents an individual from the fear of double taxation but also provides significant tax benefits to the taxpayers. However, if you wish to take full benefit of this agreement, it is vital to understand its rules, which may seem complex. Worry not, seeking assistance from an expert can be a good decision.

At SaveTaxs, we have a team of expert CAs with nearly 30 years of experience in this field. They will help you make the most out of the India-UK DTAA treaty by providing expert guidance and assistance, ultimately saving your tax and ensuring you comply with all the rules. You can contact us anytime, as we are working around the clock to help you by providing tax-related advice or to maximize your tax savings.