Double Taxation Avoidance Agreement between India and Nepal: A Comprehensive Guide

The Double Taxation Avoidance Agreement (DTAA) between India and Nepal is a bilateral agreement that aims to prevent the double taxation of income earned by individuals and companies from both countries. The agreement lays down the rules for taxability of income and ensures that taxpayers are not subjected to taxation in both countries on the same income. In this article, we will discuss the salient features of the India-Nepal DTAA and its implications for taxpayers.

Background and Significance

India and Nepal share a unique bond, and their close relations are reflected in their economic ties as well. The DTAA between the two countries was signed in 1987 and came into effect in 1990. The primary objective of the agreement is to promote economic cooperation and prevent double taxation of income generated in both countries.

The agreement is significant as it establishes a framework for the exchange of information between the tax authorities of both countries. This means that the income tax department of one country can access relevant information about taxpayers from the other country. This helps in the effective implementation of tax laws and ensures that taxpayers do not evade taxes by hiding their income in the other country.

Scope of the Agreement

The DTAA between India and Nepal applies to all persons who are residents of either country. The term `resident` means any individual, company, or other entity that is liable to tax in either country based on its place of incorporation, registration, or management. The agreement covers different types of income, including dividends, interest, royalties, fees for technical services, and business profits.

The agreement also provides for the taxation of capital gains earned by residents of one country from the sale of assets located in the other country. However, the agreement grants the right of taxation of such capital gains to the country where the seller is a resident. This means that if a Nepalese resident sells a property situated in India, the capital gains tax will be levied in Nepal.

Taxation of Income

Under the India-Nepal DTAA, income earned by a resident of one country in the other country is liable to tax only in the country where the income arises. However, certain types of income are subject to tax in both countries, but the agreement provides for relief from double taxation in such cases.

For example, if a Nepalese resident earns income from a business operation in India, the income will be taxable in India. However, the agreement provides that if the income is also taxable in Nepal, a credit for the tax paid in India can be claimed against the tax liability in Nepal. This ensures that the same income is not taxed twice, and the taxpayer is not subjected to double taxation.

Conclusion

The India-Nepal DTAA is an essential agreement that promotes economic cooperation between the two countries. The agreement provides a framework for the taxation of income generated in either country and ensures that taxpayers are not subjected to double taxation. The agreement also provides for the exchange of information between the tax authorities of both countries, which helps in the effective implementation of tax laws. The agreement`s scope covers various types of income, and taxpayers can claim a credit for tax paid in one country against their liability in the other country. Overall, it is a well-designed agreement that benefits taxpayers from both countries and promotes economic growth.