India to push for exchange of information clause in DTAAs

New Delhi, March 24 | Updated: Mar 25 2005, 05:30am hrs
India would pitch for incorporation of a standard exchange of information (EoI) clause, in conformity with relevant UN and OECD guidelines, in all extant and future bilateral double taxation avoidance agreements (DTAAs). The move, according to senior finance ministry officials, is aimed at curbing misuse of these agreements for tax evasion. EoI clauses are also expected to function as effective anti-black money mechanisms.

World over, EoI clauses are increasingly built in DTAAs since it is being felt that countries in DTAAs should not only avoid double taxation on overseas income of respective residents by that means, but should use such treaties for a more accurate determination of such income for fair taxation. Even as the principle is that domestic law would prevail wherever they are more beneficial to the taxpayer than the corresponding overseas laws, there is a need to plug the loopholes in DTAAs so that they are only to the extant of tax planning and not for tax evasion, an official said.

While India-Mauritius DTAA is up for review which would see incorporation of EoI clause among other things, the government is keen on including similar safeguards in other DTAAs currently being re-negotiated such as the pacts with Japan and Malaysia. Currently, of Indias DTAAs with as many as 70 countries, very few have proper EoI clauses compliant with the OECD and UN norms.

Meanwhile, India and Japan are likely to cut the rate of withholding tax under bilateral DTAA (the amount withheld by resident while making payments to the foreigner to essure tax levy), in respect of income of royalty and technical services from 20% to 10%. The proposal, if implemented, would benefit I-T companies such as Infosys, Wipro and TCS in augmenting export sales of software services in Japan. The Budget 2005 had already reduced domestic tax on royalty income from 20% to 10%. So, India has no reason to expect resident citizens to pay a higher tax in Japan as they earn income in that country. As for interest, dividend and royalty incomes, DTAAs offer a special dispensation, wherein each country defines a particular tax rate the other can enforce.