India has notified the revised double tax avoidance agreement with South Korea under which capital gains tax will be levied at the source with effect from April 1, 2017. The existing Double Taxation Avoidance Convention, which has been in vogue for three decades, provides for residence-based taxation of capital gains on shares, which means taxes were to be paid where the investor was a resident.
“The revised DTAA aims to avoid the burden of double taxation for taxpayers of two countries in order to promote and stimulate flow of investment, technology and services between India and Korea,” a CBDT statement said.
It will provide tax certainty to the residents of India and Korea, it added.
In order to promote cross-border flow of investments and technology, the revised DTAA provides for reduction in withholding tax rates to 10 per cent on royalties or fees for technical services from 15 per cent and to 10 per cent on interest income from 15 per cent.
“The existing DTAA provided for residence-based taxation of capital gains on shares. In line with India’s policy of taxation of capital gains on shares, the revised DTAA provides for source-based taxation of capital gains arising from alienation of shares comprising more than 5 per cent of share capital,” CBDT said.
The treaty also allows investors to invoke Mutual Agreement Procedure (MAP) in transfer pricing disputes as well as apply for bilateral Advance Pricing Agreements (APAs).
It provides for exchange of information, including by financial institutions. “Information exchanged under the revised DTAA can now be used for other law enforcement purposes with authorisation of information supplying country”.
The revised DTAA was signed on May 18, 2015, during the visit of Prime Minister Narendra Modi to Seoul and was notified on September 12, 2016, on completion of procedural requirements by both the countries.
“Provisions of new DTAA will have effect in India in respect of income derived in fiscal years beginning on or after April 1, 2017,” the statement added.
To facilitate movement of goods through shipping between two countries and in accordance with international principle of taxation of shipping income, the revised DTAA provides for exclusive residence-based taxation of shipping income from international traffic.
The reworked DTAA inserts new Article for assistance in collection of taxes between tax authorities.
It also inserts new Limitation of Benefits Article i.e. anti-abuse provisions to ensure the benefits of the agreement are availed only by the genuine residents of both the countries.