Double Taxation Avoidance Agreement with Pakistan: An Overview

A Double Taxation Avoidance Agreement (DTAA) is a treaty between two countries that aims to eliminate taxation on the same income or asset in both countries. Such agreements are essential for promoting cross-border investment and trade, as they provide clarity and certainty about the tax obligations of businesses and individuals operating in both countries.

In January 2021, India and Pakistan signed a DTAA to facilitate trade and investment between the two nations. This agreement replaces the previous treaty signed in 1991 and updates many of its provisions to reflect the current economic and legal landscape.

Here are some key features of the India-Pakistan DTAA:

Scope of the Agreement

The DTAA covers various types of income, including business profits, dividends, interest, royalties, and fees for technical services. It also includes provisions for avoiding double taxation on capital gains arising from the sale of shares or other assets.

Residence and Permanent Establishment

The agreement clarifies the rules for determining the residence of individuals and companies for tax purposes. It also defines what constitutes a permanent establishment (PE) in each country, which is essential for determining the tax liabilities of businesses operating in both countries.

Taxation of Business Profits

Under the new DTAA, business profits can be taxed in the country of residence of the taxpayer unless the business has a PE in the other country. In such cases, the income attributable to the PE will be taxed in the host country.

Taxation of Dividends

The withholding tax rate on dividends has been reduced to 5% from the previous rate of 10% for companies owning at least 10% of the share capital of the distributing company. For other cases, the rate remains at 15%. However, the tax rate may be further reduced or eliminated if it is lower in any other applicable treaty or agreement.

Taxation of Interest and Royalties

The DTAA reduces the withholding tax rate on interest and royalties to 7.5% from the previous rate of 10%. However, the rate may be reduced to 0% for certain types of transactions and if the recipient is a resident of the other country.

Capital Gains Taxation

The agreement provides for the taxation of capital gains arising from the sale of shares or other assets in the country of residence of the taxpayer. However, gains from the sale of immovable property located in the other country will be taxed in that country.

Conclusion

The new DTAA between India and Pakistan is a welcome step towards enhancing economic cooperation and reducing tax uncertainties for businesses and individuals operating in both countries. The agreement provides clarity and predictability about the tax obligations of taxpayers and resolves disputes related to double taxation issues.

However, it is also essential to note that a DTAA is just one aspect of the overall tax regime and should not be the sole criterion for making investment decisions. Businesses should also consider other factors such as the regulatory environment, market conditions, and political stability before investing in another country.