The Double Tax Avoidance Agreement (DTAA) is essentially a bilateral agreement entered into by two countries. The primary intention is to encourage and promote economic trade and investment between two countries by avoidance of double taxation.
The taxation of the same income by two or more countries would constitute a burden on the innocent taxpayer. The domestic laws of most of the countries, including India, reduces the complexity by affording unilateral remedy in respect of such double-taxed income.
The need for an agreement for Double Tax Avoidance arises because of separate rules in two countries about the chargeability of income on the receipt and accrual basis or the residential status. As there is no exact definition of the income and taxability thereof, which is approved internationally, a particular income may become liable to tax in two countries. Double Taxation occurs when an individual is required to pay two or more taxes for the same income, asset, or financial transaction in the different countries.
The double taxation occurs mainly due to the overlapping tax laws of countries where an individual operates his business.
The Indian government provides safeguard against double taxation on the same income under the section 90 & 91 of Income Tax Act. This relief procedure is classified into three distinct methods:
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