Despite a provision allowing treaty override, India may not have to renegotiate all its double tax avoidance agreements, once the Direct Taxes Code comes into effect. ?The provision simply gives India the leeway to pick and choose tax treaties it wants to re-negotiate. Others can simply be re-notified,? a finance ministry official said.
The draft Direct Taxes Code, unveiled last month has used the principle of lex posterior or later in time doctrine, implying that in case of a conflict, the new law would be accepted over the double taxation avoidance agreements (DTAAs). At present, the tax treaty overrides the Income Tax Act, 1961 if more beneficial. As the draft Code is scheduled to come into effect from April 1, 2011, it would obviously over ride the tax treaties.
India has 75 double tax avoidance agreements, and there have been concerns that all of them will have to be renegotiated, because of this particular clause in the draft Code. But the finance ministry has clarified that this provision will not disturb the status of all the treaties but will allow tax authorities to review of some of them.
The provision is expected to prevent companies from taking shelter under tax treaties for tax avoidance purposes. It will also come in handy for India to renegotiate such agreements with tax havens like Mauritius. Concerned by the high instances of round tripping, the finance ministry has been in talks with the island nation to review the DTAA for quite a few years now, but is yet to reach a breakthrough. In fact, finance minister Pranab Mukherjee is now scheduled to visit the country to carry forward the discussions.