INDIA AND AUSTRALIA TAX TREATY.

 INTRODUCTION
INDIA
In India, income tax was introduced in 1860, abolished in 1873 and
reintroduced in 1886. Income tax levels in India were very high between 1950
and 1980. In 1970-71 there were 11 tax slabs with highest tax rate being 93.5%
including surcharges. In 1973-74 highest rate was 97.75%. But to reduce tax
evasion tax rates were reduced later on, by 1992-93 maximum tax rates were
reduced to 40%.
The Central Government has been empowered by the Constitution of India to
levy tax on all income other than agricultural income. The Income Tax Law
comprises The Income Tax Act 1961, Income Tax Rules 1962, Notifications
and Circulars issued by Central Board of Direct Taxes (CBDT), Annual Finance
Acts and Judicial pronouncements by Supreme Court and High Courts.
Levy of tax is separate on each of the persons, including – individuals, Hindu
Undivided Families (HUFs), companies, firms, association of persons, body of
individuals, local authority and any other artificial judicial person, and is
governed by the Indian Income Tax Act, 1961. The Indian Income Tax
Department is governed by CBDT and is part of the Department of Revenue
under the Ministry of Finance, Govt. of India. Income tax is a key source of
funds that the government uses to fund its activities and serve the public.
The Income Tax Department is the biggest revenue mobilizer for the
Government. The total tax revenues of the Central Government increased from
Rs. 1,392.26 billion in 1997-98 to Rs. 5,889.09 billion in 2007-08.
AUSTRALIA:
Queensland introduced income tax in 1902 by the Income Tax Act of 1902.
Federal income tax was first introduced in 1915, in order to help fund

Australia’s war effort in the First World War. Between 1915 and 1942, income
taxes were levied at both the state and federal level.
Income taxin Australia is the most important revenue stream within
the Australian taxation system. Income tax is levied upon three sources of
income for individual taxpayers: personal earnings (such as salary and
wages), business income andcapital gains. Collectively, these three income tax
sources, account for 67% of federal government revenueand 55% of total
revenue.
Income received by individuals is taxed at progressive rates, while income
derived by companies are taxed at a flat rate of 30%. Generally, capital gains
are only subject to tax at the time the gain is realized. The Australian Taxation
office is in charge of collecting the income tax.
In Australia, the financial year runs from 1 July to 30 June of the following
year. Income tax is applied to the income of a taxable entity. Taxable income is
calculated, in a broad sense, by applying allowable deductions against the
assessable income of a taxable entity.
India Australia
Corp. Tax 34.0% 30.0%
Personal Income Tax 45.0% 33.9%
Sales Tax 10.0% 12.4%
On 16 December 2011, the governments of Australia and India signed a
protocol amending the agreement between the two countries for the avoidance
of double taxation and the prevention of fiscal evasion with respect of taxes on
income, which was signed in 1991.The protocol entered into force on 2 April
2013, when both countries completed their domestic arrangements.

THE WAY FORWARD:
The Government of India and the Government of Australia signed a protocol
onDecember 16, 2011, amending the convention entered into between the
twocountries in 1991 for the avoidance of double taxation and the prevention of
fiscalevasion with respect to taxes on income.
The salient features of the Protocol are as follows –
 The Protocol has introduced a definition of the term National under
Article 3of the Convention.
 The exclusion of services in the nature of royalty has been eliminated,
whichhas enlarged the scope of services that need to be considered to test
the ServicePE (Permanent Establishments), which was a departure from
most of the tax conventions entered into byIndia with other countries.
However, the threshold has been extended to 183days within any 12-
month period from the existing 90 days. Also, thedistinction between
associated enterprises and non-associated enterprises hasbeen removed.
Furthermore, the threshold was to be examined with respect tothe
activities carried on for the same or connected projects only.
 A threshold of 90 days in any 12-month period has been prescribed
forconstituting the PE arising out of carrying on of activities in
connection withthe exploration for or exploitation of natural resources.
 A threshold of 183 days in any 12-month period has been prescribed
toconstitute a PE arising due to carrying on of activities of operation of
thesubstantial equipment.
 The Protocol has also eliminated the Force of Attraction rule under
Article 7 – Business Profits of the Convention. Thus, profits arising on
the sale of goods orother business activities as attributable to the PE may
be subject to tax in thePE state.

 A new Article 24A on Non-discrimination has been inserted in line with
theinternational practices and was applicable to all kinds of taxes
notwithstandingArticle 2 – Taxes Covered and persons, whether or not
resident of both oreither of the contracting states. Furthermore, this
Article shall not apply to anydomestic law provisions of the contracting
states, which are enshrined toprevent the avoidance or evasion of taxes, to
address thin capitalization and toensure collection of taxes or to provide
tax incentives to eligible taxpayers inrespect of research and development
expenditure.
 Article 26 on Exchange of information in the Convention has been
amended bythe protocol in line with the treaties entered into by India
with countriesincluding Singapore, Norway, the Netherlands and Nepal.
This Article wasapplicable notwithstanding Article 1 and 2 of the
Convention and wouldhelp the Revenue Authorities of two contracting
states to exchange taxpayerinformation on a wider range of taxes.
 A new Article 26A on Assistance in Collection of Taxes has been
inserted tolend assistance to the contracting states in the collection of
revenue claims,subject to certain conditions and procedures. This Article
was in line with thetax treaties entered into by India with Norway, Nepal,
Finland, Luxemburg,Ethiopia and Armenia, among others.
 The protocol shall be effective as given below:
a) In the case of Articles on General Definitions, Permanent
Establishments,and Business Profits in the Convention, from Financial
Year 2014-15 onwards;
b) In the case of Articles on Non-Discrimination and Exchange
ofInformation in the Convention, from April 2, 2013;
c) In the case of the Article on Assistance in the Collection of Taxes in
theConvention, from July 18, 2013.

The Convention, as amended by this Protocol, provides certainty on some
aspects for taxpayers seeking to claim the benefits under India-Australia tax
treaty. At thesame time, it was facilitating the mutual economic cooperation,
administration andenforcement of the laws of the Contracting States.
 AREAS OF TAX TREATY-OBJECTIVES
The Government of the Republic of India and the Government of Australia,
Desiring to conclude an Agreement for the avoidance of double taxation and the
prevention of fiscal evasion with respect to taxes on income.
Have agreed as follows and have the following objectives:
Article 1
PERSONAL SCOPE
This Agreement shall apply to persons who are residents of one or both of the
Contracting States.
Article 2
TAXES COVERED
1. The existing taxes to which this Agreement shall apply are:
a. In Australia:
The income-tax, and the resource rent tax in respect of offshore projects relating
to exploration for or exploitation of petroleum resources, imposed under the
federal law of the Commonwealth of Australia;
b. In India:
i the income-tax including any surcharge thereon; and
ii the surtax imposed on chargeable profits of companies.
Article 3

GENERAL DEFINITIONS
1. For the purposes of this Agreement, unless the context otherwise requires:
a. the term "Australia", when used in a geographical sense, excludes all
external territories other than:
i. the Territory of Norfolk Island;
ii. the Territory of Christmas Island;
iii. the Territory of Cocos (Keeling) Islands;
iv. the Territory of Ashmore and Cartier Islands;
v. the Territory of Heard Island and McDonald
Islands; and
vi. the Coral Sea Islands Territory,
and includes any area adjacent to the territorial limits of Australia (including the
Territories specified in sub-paragraphs (i) to (vi) inclusive) in respect of which
there is for the time being in force, consistently with international law, a law of
Australia dealing with the exploitation of any of the natural resources of the sea-
bed and sub-soil of the continental shelf;
b. the term "India" means the territory of India and includes the territorial sea
and the air space above it, as well as any other maritime zone in which India has
sovereign rights, other rights and jurisdictions, according to the Indian law and
in accordance with international law;
Article 4
RESIDENCE
1. For the purposes of this Agreement, a person is a resident of one of the
Contracting States if the person is a resident of that Contracting State for the

purposes of its tax. However, a person is not a resident of a Contracting State
for the purposes of this Agreement if the person is liable to tax in that State in
respect only of income from sources in that State.
2. Where in an individual is a resident of both Contracting States, then the status
of that person shall be determined in accordance with the following rules:
a. the person shall be deemed to be a resident solely of the Contracting State in
which a permanent home is available to the person;
b. if a permanent home is available to the person in both Contracting States, or
in neither of them, the person shall be deemed to be a resident solely of the
Contracting State with which the person's personal and economic relations are
closer..
For the purposes of this paragraph, an individual's citizenship of a Contracting
State as well as that person's habitual abode shall be factors in determining the
degree of the person's personal and economic relations with that Contracting
State.'
Article 5
PERMANENT ESTABLISHMENT
1. For the purposes of this Agreement, the term "permanent establishment"
means a fixed place of business through which the business of an enterprise is
wholly or partly carried on.
2. The term "permanent establishment" shall include especially:
a. a place of management;
b. a branch;
c. an office;
d. a factory;
e. a workshop;

f. a mine, an oil or gas well, a quarry or any other place of extraction of
natural resources;
g. a warehouse in relation to a person providing storage facilities for others;
h. a farm, plantation or other place where agricultural, pastoral, forestry or
plantation activities are carried on;
i. premises used as a sales outlet or for receiving or soliciting orders;
j. an installation or structure, or plant or equipment, used for the exploration
for or exploitation of natural resources;
k. a building site or construction, installation or assembly project, or
supervisory activities in connection with such a site or project, where that site or
project exists or those activities are carried on (whether separately or together
with other sites, projects or activities) for more than six months.
3. An enterprise shall be deemed to have a permanent establishment in one of
the Contracting States And to carry on business through that permanent
establishment if:
a. substantial equipment is being used in that State by, for or under a contract
with the enterprise;
b.it carries on activities in that State in connection with the exploration for or
exploitation of natural resources in that State; or
Article 6
INCOME FROM REAL PROPERTY (IMMOVABLE PROPERTY)
1. Income from real property may be taxed in the Contracting State in which
that property is situated.
2. For the purposes of this Article, the term "real property":
a. in the case of Australia, has the meaning which it has under the laws of
Australia and shall include:

i. a lease of land and any other interest in or over land, whether improved or
not; and
ii. a right to receive variable or fixed payments either as consideration for the
working of or the right to work or explore for, or in respect of the exploitation
of, mineral or other deposits, oil or gas wells, quarries or other places of
extraction or exploitation of natural resources; and
b. in the case of India, means such property which, according to the laws of
India, is immovable property and shall include
i. property accessory to immovable property;
ii. rights to which the provisions of the general law respecting landed property
apply;
Article 7
BUSINESS PROFITS
1. The profits of an enterprise of one of the Contracting States shall be taxable
only in that State unless the enterprise carries on business in the other
Contracting State through a permanent establishment situated therein. If the
enterprise carries on business as aforesaid, the profits of the enterprise may be
taxed in the other State but only so much of them as is attributable to:
a. that permanent establishment; or
b. sales within that other Contracting State of goods or merchandise of the
same or a similar kind as those sold, or other business activities of the same or a
similar kind as those carried on, through that permanent establishment.
Article 8
SHIPS AND AIRCRAFT

1. Profits from the operation of ships or aircraft, including interest on funds
connected with that operation, derived by a resident of one of the Contracting
States shall be taxable only in that State
Article 9
ASSOCIATED ENTERPRISES
1. Where:- a. an enterprise of one of the Contracting States participates directly
or indirectly in the management, control or capital of an enterprise of the other
Contracting State; or
b. the same persons participate directly or indirectly in the management, control
or capital of an enterprise of one of the Contracting States and an enterprise of
the other Contracting State,
Article 10
DIVIDENDS
1. Dividends paid by a company which is a resident of one of the Contracting
States for the purposes of its tax, being dividends to which a resident of the
other Contracting State is beneficially entitled, may be taxed in that other State.
2. Such dividends may also be taxed in the Contracting State of which the
company paying the dividends is a resident for the purposes of its tax, and
according to the law of that State, but the tax so charged shall not exceed 15 per
cent. of the gross amount of the dividends.
3. The term "dividends" in this Article means income from shares and other
income which is subjected to the same taxation treatment as income from shares
by the laws of the Contracting State of which the company making the
distribution is a resident for the purposes of its tax.
Article 11
INTEREST

1. Interest arising in one of the Contracting States, being interest to which a
resident of the other Contracting State is beneficially entitled, may be taxed in
that other State.
2. Such interest may also be taxed in the Contracting State in which it arises,
and according to the law of that State, but the tax so charged shall not exceed 15
per cent. of the gross amount of the interest.
3. The term "interest" in this article includes interest from Government
securities or from bonds or debentures, whether or not secured by mortgage and
whether or not carrying a right to participate in profits, and interest from any
other form of indebtedness as well as all other income assimilated to income
from money lent by the law, relating to tax, of the Contracting State in which
the income arises, but does not include interest referred to in paragraph (1) of
Article 8.
Article 12
ROYALTIES
1. Royalties arising in one of the Contracting States, being royalties to which a
resident of the other Contracting State is beneficially entitled, may be taxed in
that other State.
2. Such royalties may also be taxed in the Contracting State in which they arise,
and according to the law of that State, but the tax so charged shall not exceed a
particular range.
Article 13
ALIENATION OF PROPERTY
1. Income or gains derived by a resident of one of the Contracting States from
the alienation of real property referred to in Article 6 and, as provided in that
article, situated in the other Contracting State may be taxed in that other State.

2. Income or gain derived from the alienation of property, other than real
property referred to in Article 6, that forms part of the business property of a
permanent establishment which an enterprise of one of the Contracting States
has in the other Contracting State or pertains to a fixed base available to a
resident of the first-mentioned State in that other State for the purpose of
performing independent personal services, including income or gains from the
alienation of such a permanent establishment (alone or with the whole
enterprise) or of such a fixed base, may be taxed in that other State.
Article 14
INDEPENDENT PERSONAL SERVICES
1. Income derived by an individual or a firm of individuals (other than a
company) who is a resident of one of the Contracting States in respect of
professional services or other independent activities of a similar character shall
be taxable only in that State unless:
a. the individual or firm has a fixed base regularly available to the individual or
firm in the other Contracting State for the purpose of performing the
individual's or the firm's activities, in which case the income may be taxed in
that other State but only so much of it as is attributable to activities exercised
from that fixed base; or
2.The term "professional services" includes services performed in the exercise
of independent scientific, literary, artistic, educational or teaching activities as
well as in the exercise of the independent activities of physicians, surgeons,
lawyers, engineers, architects, dentists and accountants.
Article 15
DEPENDENT PERSONAL SERVICES
1. Subject to the provisions of Articles 16, 17, 18, 19 and 20, salaries, wages
and other similar remuneration derived by an individual who is a resident of one

of the Contracting States in respect of an employment shall be taxable only in
that State unless the employment is exercised in the other Contracting State.
2. Notwithstanding the provisions of paragraph (1), remuneration derived by an
individual who is a resident of one of the Contracting States in respect of an
employment exercised In the other Contracting State shall be taxable only in the
first-mentioned State if:
a. the recipient is present in that other State for a period or periods not
exceeding in the aggregate 183 days in a year of income of that other State;
b. the remuneration is paid by, or on behalf of, an employer who is not a
resident of that other State;
c. the remuneration is not deductible in determining taxable profits of a
permanent establishment or a fixed base which the employer has in that other
State.
Article 16
DIRECTORS' FEES
Directors' fees and similar payments derived by a resident of one of the
Contracting States as a member of the board of directors of a company which is
a resident of the other Contracting State may be taxed in that other State.
Article 17
ENTERTAINERS
1. Notwithstanding the provisions of Articles 14 and 15, income derived by
residents of one of the Contracting States as entertainers, such as theatre, motion
picture, radio or television artistes, musicians and athletes, from their personal
activities as such exercised in the other Contracting State, may be taxed in that
other State.

2. Where income in respect of the personal activities of an entertainer as such
accrues not to that entertainer but to another person, that income may,
notwithstanding the provisions of Articles 7, 14 and 15, be taxed in the
Contracting State in which the activities of the entertainer are exercised.
Article 18
PENSIONS AND ANNUITIES
1. Pensions (not including pensions referred to in Article 19) and annuities
paid to a resident of one of the Contracting States shall be taxable only in that
State.
2. The term "annuity" means a stated sum payable periodically at stated times
during life or during a specified or ascertainable period of time under an
obligation to make the payments in return for adequate and full consideration in
money or money's worth.Article 19
GOVERNMENT SERVICE
1. Remuneration, other than a pension or annuity paid by one of the
Contracting States or a political sub-division or local authority of that State to
any individual in respect of services rendered in the discharge of Governmental
functions, shall be taxable only in that State. However, such remuneration shall
be taxable only in the other Contracting State if the services are rendered in that
other State and the recipient is, a resident of that other State who:
a. is a citizen of that State; or
b. did not become a resident of that State solely for the purpose of performing
the services.
Article 20
PROFESSORS AND TEACHERS

1. Where a professor or teacher who is a resident of one of the Contracting
States visits the other Contracting State for a period not exceeding two years for
the purpose of teaching or carrying out advanced study or research at a
university, college, school or other educational institution, any remuneration
that person receives for such teaching, advanced study or research shall be
exempt from tax in that other State to the extent to which such remuneration is,
or upon the application of this article will be, subject to tax in the first-
mentioned State.
2. This article shall not apply to remuneration which a professor of teacher
receives for conducting research if the research is undertaken primarily for the
private benefit of a specific person or persons.
Article 21
STUDENTS AND TRAINEES
Where a student or trainee, who is a resident of one of the Contracting States or
who was a resident of that State immediately before visiting the other
Contracting State and who is temporarily present in that other State solely for
the purpose of the student's or trainee's education or training, receives payments
from sources outside that other State for the purpose of the student's or trainee's
maintenance, education or training, those payments shall be exempt from tax in
that other State.
Article 22
INCOME NOT EXPRESSLY MENTIONED
1. Items of income of a resident of one of the Contracting States which are not
expressly mentioned in the foregoing articles of this Agreement shall be taxable
only in that State.

2. However, any such income derived by a resident of one of the Contracting
States from sources in the other Contracting State may also be taxed in that
other State.
Article 23
SOURCE OF INCOME
1. Income, profits or gains derived by a resident of one of the Contracting
States which, under any one or more of Articles 6 to 8, Articles 10 to 20 and
Article 22 may be taxed in the other Contracting State, shall for the purposes of
the law of that other State relating to its tax be deemed to be income from
sources in that other State.
2. Income, profits or gains derived by a resident of one of the Contracting
States which, under any one or more of Articles 6 to 8, Articles 10 to 20 and
Article 22 may be taxed in the other Contracting State, shall for the purposes of
Article 24 and of the law of the first-mentioned State relating to its tax be
deemed to be income from sources in that other State.
Article 24
METHODS OF ELIMINATION OF DOUBLE TAXATION
a. Subject to the provisions of the law of Australia from time to time in force
which relate to the allowance of a credit against Australian tax of tax paid in a
country outside Australia (which shall not affect the general principle hereof),
Indian tax paid under the law of India and in accordance with this Agreement,
whether directly or by deduction, in respect of income derived by a person who
is a resident of Australia from sources in India shall be allowed as a credit
against Australian tax payable in respect of that income.
b. Where a company which is a resident of India and is not a resident of
Australia for the purposes of Australian tax pays a dividend to a company which
is a resident of Australia and which controls directly or indirectly not less than

10 per cent. of the voting power of the first-mentioned company, the credit
referred to in sub-paragraph (a) shall include the Indian tax paid by that first-
mentioned company in respect of that portion of its profits out of which the
dividend is paid.
In paragraph (1), Indian tax paid shall include:
a. subject to sub-paragraph
b. an amount equivalent to the amount of any Indian tax forgone which, under
the law of India relating to Indian tax and in accordance with this Agreement,
would have been payable as Indian tax on income but for an exemption from, or
reduction of, Indian tax on that income in accordance with:
i. section 10(4), 10(15)(iv), 10A, 10B, 80HHC, 80HHD or 80-I of the
Income-tax Act, 1961, insofar as those provisions were in force on, and have
not been modified since, the date of signature of this Agreement, or have been
modified only in minor respects so as not to affect their general character; or
ii. any other provision which may subsequently be made granting an
exemption from or reduction of Indian tax which the Treasurer of Australia and
the Ministry of Finance of India agree from time to time in letters exchanged for
this purpose to be of a substantially similar character, if that provision has not
been modified thereafter or has been modified only in minor respects so as not
to affect its general character; and
c. in the case of interest derived by a resident of Australia which is exempted
from Indian tax under the provisions referred to in sub-paragraph (a), the
amount which would have been payable as Indian tax if the interest had not
been so exempt and if the tax referred to in paragraph (2) of Article 11 did not
exceed 10 per cent. of the gross amount of the interest.
3. Paragraph (2) shall apply only in relation to income derived in any of the
first ten years of income in relation to which this Agreement has effect under

sub-paragraph (1)(a)(ii) of Article 28 or in any later year of income that may be
agreed by the Contracting States in letters exchanged for this purpose.
4. In the case of India, double taxation shall be avoided as follows:
a. the amount of Australian tax paid under the laws of Australia and in
accordance with the provisions of this Agreement, whether directly or by
deduction, by a resident of India in respect of income from sources within
Australia which has been subjected to tax both in India and Australia shall be
allowed as a credit against the Indian tax payable in respect of such income but
in an amount not exceeding that proportion of Indian tax which such income
bears to the entire income chargeable to Indian tax; and
b. for the purposes of the credit referred to in sub-paragraph (a) above, where
the resident of India is a company by which surtax is payable, the credit to be
allowed against Indian tax shall be allowed in the first instance against the
income-tax payable by the company in India and, as to the balance, if any,
against the surtax payable by it in India.
5. Where a resident of one of the Contracting States derives income which, in
accordance with the provisions of this Agreement, shall be taxable only in the
other Contracting States, the first-mentioned State may take that income into
account in calculating the amount of its tax payable on the remaining income of
that resident.
Article 25
MUTUAL AGREEMENT PROCEDURE
1. Where a person who is a resident of one of the Contracting States
considers that the actions of the taxation authority of one or both of the
Contracting States result or will result for the person in taxation not in
accordance with this Agreement, the person may, notwithstanding the remedies
provided by the national laws of those States, present a case to the competent

authority of the Contracting State of which the person is a resident. The case
must be presented within three years from the first notification of the action
giving rise to taxation not in accordance with this Agreement.
Article 26
EXCHANGE OF INFORMATION
1. The competent authorities of the Contracting States shall exchange such
information as is necessary for the carrying out of this Agreement or of the
domestic laws of the Contracting States concerning the taxes to which this
Agreement applies insofar as the taxation there under is not contrary to this
Agreement, or for the prevention of evasion or avoidance of, or fraud in relation
to, such taxes. The exchange of information is not restricted by Article 1. Any
information received by the competent authority of a Contracting State shall be
treated as secret in the same manner as information obtained under the domestic
laws of that State and shall be disclosed only to persons or authorities (including
courts and administrative bodies) concerned with the assessment or collection
of, enforcement or prosecution in respect of, or the determination of appeals in
relation to, the taxes to which this Agreement applies and shall be used only for
such purposes. They may disclose the information in public court proceedings
or in judicial decisions.
Article 27
DIPLOMATIC AND CONSULAR OFFICIALS
Nothing in this Agreement shall affect the fiscal privileges of diplomatic or
consular officials under the general rules of international law or under the
provisions of special international Agreements.
Article 28
ENTRY INTO FORCE

1. This Agreement shall enter into force on the date on which the Contracting
States exchange notes through the diplomatic channel notifying each other that
the last of such things has been done as is necessary to give this Agreement the
force of law in Australia and in India, as the case may be, and thereupon this
Agreement shall have effect:
a. In Australia:
i. in respect of withholding tax on income that is derived by a non-resident, in
relation to income derived on or after 1st July in the calendar year following
that in which the Agreement enters into force;
ii. in respect of other Australian tax, in relation to income, profits or gains of
any year of income beginning on or after 1st July, in the calendar year next
following that in which the Agreement enters into force;
b. In India:
in respect of income, profits or gains arising in any year of income beginning on
or after 1st April, in the calendar year next following that in which the
Agreement enters into force.
. The Agreement made between the Government of Australia and the
Government of the Republic of India for the avoidance of double taxation of
income derived from International air transport signed at Canberra on 31st May,
1983 (in this article called "1983 Agreement") shall cease to have effect with
respect to taxes to which this Agreement applies when the provisions of this
Agreement become effective in accordance with paragraph (1).
4. The 1983 Agreement shall terminate on the expiration of the last date on
which it has effect in accordance with the foregoing provisions of this Article.

 Impact of FDI & Liberalization on Tax Treaties
The current wave of globalization and liberalization sweeping across the world has
activated the governments in developing countries to compete for foreign direct
investment (FDI).
Encouragement of FDI is an integral part of the economic reforms process of these
countries because it is seen as an instrument of technology transfer, managerial skills,
augmentation of foreign exchange reserves and globalization of the economy.
With a view to provide a conducive environment to foreign investment, many countries,
including India, are redesigning their tax systems to make them internationally
competitive.
Bilateral tax treaties are a part of this exercise to alleviate the problem of international
double taxation.
Bilateral tax treaties are signed, to facilitate the inflow of FDI. Such treaties restrict the
taxation of corporate income of foreign investors and hence affect their profits
positively.
It is generally assumed that having a smaller share of revenues as a result of tax
concessions would, in the long-run, be compensated for by increased inflows of FDI
and other benefits that are part of the FDI package.
In India, the Central Government, under Section 90 of the Income Tax Act, has entered
into Double Taxation Avoidance Agreements or bilateral tax treaties with other
countries.

These tax treaties serve the purpose of providing protection to taxpayers against double
taxation and thus preventing any discouragement which double taxation may otherwise
cause in the free flow of international investment and international transfer of
technology.Section 90 of the Act provides that a treaty may be entered into (a) for
grant of relief in respect of income which is taxed in both the countries, (b) for the
avoidance of double taxation on income, (c) for exchange of information for the
prevention of evasion or avoidance of income tax and (d) for the recovery of
income tax.
Broadly speaking, in India’s tax treaties, double taxation relief is provided by a
combination of the exemption method and tax credit method. Further, Section 91
of the Act provides for the grant of unilateral relief in the case of resident
taxpayers on income which has suffered in India as well as in the country with
which there is no Double Taxation Avoidance Agreement.
A comparison of patterns of change in FDI flows in the pre-treaty period and the
post-treaty period is possible only in case of such countries where the treaty was
entered into a few years after 1991. This is because where the treaty was entered
into prior to 1991; it was not of much significance in terms of FDI flows as the
Indian economy was opened up to foreign investment only after 1991.
Thus, it was only after foreign investment started coming to the economy that the
question of treaty provisions became relevant. Mauritius is a case in point.

The tax treaty with Mauritius was signed in August 1982. Giving special
consideration to business entities of Mauritius, the treaty specified that capital
gains made on the sale of shares of Indian companies by investors resident in
Mauritius would be taxed only in Mauritius and not in India. For almost 10 years,
the treaty existed only on paper since foreign institutional investors (FIIs) were
not allowed to invest in Indian stock markets. This changed in 1992 when FIIs
were allowed into India. Coinciding with this liberalization of the Indian
economy, the Government of Mauritius promulgated the Mauritius Offshore
Business Activities Act, 1992 to regulate the offshore business in that country.
This Act allowed foreign companies to register in Mauritius for investing abroad.
A body corporate registered under the laws in Mauritius would be a resident in
Mauritius and thus ‘subject to taxation’ as a resident. Income Tax Act of
Mauritius provided that offshore companies were liable to pay ‘zero percent’ tax.
Thus, by bringing an offshore company within the definition of resident, not only
was the benefit of offshore company extended to it but also the benefits of
residency allowable under the DTAA bestowed on it.
This led to establishment of conduit companies in Mauritius through which
investors of third countries routed their investment to India. By doing so, they
avoided paying capital gains tax altogether and also enjoyed low rates of dividend
and income taxes in Mauritius.

This, in fact, is one of the reasons why Mauritius is the single largest investing
country in India since 1993 despite its small size.
In case of countries where the treaty was entered into in 1991 or a year after that
(such as in the case US, Japan and Netherlands), the increase in FDI observable
after the signing of the treaty could be largely due to the liberalization of the
Indian economy, although treaty provisions may also have a role to play.
While in some countries (US and France) FDI flows have seen a consistent rise
since the signing of treaty, in some others no particular trend is discernible (such
as UK and Switzerland). In certain cases, we do not see an immediate rise in FDI
activity once the treaty has been signed. This could be due to the fact in the short-
run, new treaties may increase investor uncertainty. Since a new treaty is yet to be
tested in both the Contracting States and may have unresolved legal issues, it
could actually increase the perceived risk of investment between treaty partners
until unsettled issues are resolved.
Thus, in the short-run, the treaty may lead to a reduction in FDI activity. Over the
long run, however, this uncertainty will be resolved, clearing the way for the
treaty to promote investment.

 Statistical evaluation and analysis.
Table 2.1 puts recent macroeconomic and trade data for both countries in a
broader comparative context. It is evident that the two economies are different in
various ways and similar in others. Such similarities and divergences may
provide avenues for economic interactions and cooperation. The present joint
study is an endeavour to explore such possibilities and to suggest ways and means
to harness economic synergies to the maximum extent feasible.

Table 2.2 India's developmental trajectory, therefore, owes much to the broad-
based growth in the services sector of the economy. Services have contributed
around 69 per cent of the overall average growth of GDP in the period 2002-03 to
2006–07. Interestingly, services falling under the rubric of trade, hotels, transport
and communications have clocked double digit growth (Table 2.2) since 2003-04
except in 2008–09 (period of global slowdown). Services exports increased
threefold during the last three years. Preliminary estimates indicate that an annual
growth of 26 per cent was achieved during 2008–09. Growth has been
particularly rapid in exports of software services, business services, financial
services and communication services.
Table 2.3 In 2008, while India's share and ranking in world merchandise exports
were 1 per cent and 26th, respectively, its share and ranking in world commercial
services exports was 2.7 per cent and 10th, respectively. Services exports grew
much faster than merchandise exports and constituted almost 60 per cent of
merchandise exports in 2005–06. The composition of India's services exports and
growth in specific sectors is represented in Table 2.3.

Table 2.4 While it is well known that Indian software services have been
growing for some time, other services such as management and consultancy,
advertising and trade fairs, financial services, architectural and engineering
services are emerging as major foreign exchange earners (see Table 2.4).
Business services, which also include legal, accounting and auditing services and
environmental services, achieved exports of US$12.9 billion in 2005–06 as
against US$23.6 billion from software services. This has been made possible
because of the widespread expansion of the telecommunications sector and the
increasing digitisation of various services, making it possible to supply services
remotely. This is also referred to as Cross Border Supply (Mode 1).
Table 2.5 An emerging feature of India's economy is the growing importation of
services (see Table 2.5). India's import of services grew more than ten-fold during

the period 1990-91 to 2005–06. The rapid growth in the import of services is
being fuelled by sustained 8 per cent plus economic growth and increased
engagement by India with the world economy. The growth in services imports is
spread across most sectors.
Imports of commercial services have become important in recent years reaching
US$44 billion in 2006–07 with annual growth of 29 per cent. Business services
are the most important category of services imports, followed by transportation
and travel. Business services grew by 121 per cent in 2006–07.
Temporary movement of people to deliver services is an area of great importance
for India given the growing work-age population and increasing potential to
supply services through movement of skilled persons. India identifies several
domestic laws and regulations that apply to free movement of natural persons to
Australia, including in relation to the ability of Indian service providers to visit
Australia for providing different types of services.

Table 3.1 shows Australia's top merchandise exports to India in 2008–09.
Commodity exports dominate, consistent with the traditional pattern of trade.
Coal, gold, and copper were Australia's three principal exports, with fertilisers,
manganese, wool, aluminium, vegetables and lead also significant.
While Australia's main exports are commodities, manufactured goods exports
(including semi-manufactured gold) to India have also been growing strongly.
Manufactured exports have grown to US$5,169 million in 2008–09 — displaying
an average annual growth of over 21 per cent over the last 5 years.
The main products in which there is current growth for Australia's manufactured
exports to India include fertilisers, aluminium, machinery, aircraft and associated
equipment, and perfumery and cosmetics or toilet preparations. The main imports
from India where there has been significant growth pharmaceutical products.

Table 3.2 As with merchandise exports, services exports to India have grown
rapidly, from US$306 million in 2002–03 to US$2.5 billion in 2008–09.
Australia's dominant services export to India in 2008–09 was education related
travel services (US$2.1 billion), a reflection of the number of Indian students
studying in Australia.
It is important to note that services trade data does not take account of services
delivered by Australian companies with a commercial presence in India.
Australian companies have established a presence in a range of Indian services
sectors such as engineering, infrastructure design, health, financial services and
mining services industries.

Table 3.3 India's key merchandise exports to Australia by broad product groups
are shown in Table 3.3. The major product group in 2008–09 among India's
merchandise exports to Australia was machinery and equipment, constituting a
share of around 29 per cent. The other major items in India's exports to Australia
included textiles and garments (14 per cent), gems and jewellery (8 per cent),
base metals (10 per cent), chemicals (12 per cent), vegetables products[7] (7 per
cent), plastics and rubber (4 per cent) and leather and leather products (4 per
cent). Over recent years the percentage of textiles and garments from India as a
proportion of Australia's total merchandise imports has fallen.
Table 3.4 India exports a range of services to Australia, including ITeS, software
and BPO — see Table 3.4. India's exports to Australia have grown over the last

decade. The balance of services trade is in Australia's favour. The major Indian
exports to Australia, by sector, are: travel services, IT and IT enabled services
and other business services.
The growth in travel services indicates increasing interest in India towards
Australia as a tourist destination, as well as travel from India to visit Indian origin
residents in Australia or students from India studying in Australia.
Table 4.1 Total FDI into India since the onset of the Indian liberalisation
process has reached US$133.6 billion up to June 2009.
India's FDI policy has been liberalised in recent years as a result of a
comprehensive review of policy in 2006, including liberalisation of a number of
sectors in 2008 and the revision of norms for calculation of total foreign
investment and for transfer of ownership and control from resident Indian citizens
to non-resident entities in 2009. The result has been a marked upswing in FDI
inflows, from US$2.22 billion in 2003–04 to US$24.58 billion in 2008–09.

An analysis of FDI flows into India from Australia reveals that investment from
Australia has risen off a low base (Table 4.1) since the announcement of India's
new industrial policy in August 1991. Australia's FDI in India as a percentage of
total Indian FDI has remained low and relatively constant.
Table 4.2 it shows the principal Indian sectors receiving Australian FDI inflows.
Australian investment has benefited India's metallurgical industries, services,
telecoms, consultancy and hotel and tourism sectors.

In its analysis of global FDI trends, the World Investment Report (UNCTAD,
2007) noted that India was the second most attractive location for FDI for 2007-
09. India has also improved its position by two places in the World Economic
Forum's Global Competitive Index (GCI) rankings for 2006–07, coming 43rd.
Top sectors attracting FDI inflows to India (from April 2000 to April 2009) are
the services sector (22.96 per cent),computer hardware and software sector (10.46
per cent), telecommunications sector (8.21 per cent) and housing and real
estate(6.72 per cent) as shown in Table.
Analysis.
These are the main features of the updated arrangements.
Cross-border services will be taxable in the country of source where those
services are performed in that other country for more than 183 days in 12 months.
Source-country taxation will apply to profits derived from natural resource
exploration or exploitation activities – where those activities are undertaken for
more than 90 days in 12 months.

Source-country taxation will apply to profits derived from the operation of
substantial equipment – where such operation continues for more than 183 days
in 12 months.
Only the profits attributable to an enterprise's permanent establishment (branch)
in Australia or India may be taxed in that country. This will remove the force-of-
attraction rule in the existing treaty which allows for the taxation of indirect
profits connected with a permanent establishment.
A new non-discrimination article will protect nationals and businesses of one
country from tax discrimination in the other country.
The exchange-of-information article has been updated to the current international
standard and will also allow the revenue authorities of Australia and India to
exchange taxpayer information on a wider range of taxes.
A new article regarding assistance in the collection of taxes will allow the
revenue authorities of Australia and India to assist each other in the collection of
outstanding tax debts.
Withholding tax rates on dividends, interest and royalties, and withholding tax
rates on managed investment trust distributions, remain unchanged and apply as
set out in the original (1991) agreement.

Conclusion
Both countries can make gains through further services liberalisation and with
this in mind could undertake to make substantive, high-quality commitments. To
maximise the potential gains India and Australia should aim for:
liberalisation which delivers meaningful commercial outcomes in services;
substantial sectoral coverage measured in terms of number of sectors, volume of
trade and modes of supply;
basing rules and disciplines on trade in services on GATS provisions and
improving them further wherever possible including, potentially, domestic
regulations;
giving priority to areas with greater potential and complementarities between
both the counties, such as computer-related services, financial services, tourism
services , professional services and educational services;
maximising trade through Movement of Natural Persons;
committing to work towards a mutual recognition of professional qualifications
by authorities and professional registration bodies in Australia and India; and
maximise trade in services to the benefit of the economies of the parties.

 Taxation System in India
India has a well-developed tax structure with clearly demarcated authority
between Central and State Governments and local bodies.
Central Government levies taxes on income (except tax on agricultural income,
which the State Governments can levy), customs duties, central excise and
service tax.
Value Added Tax (VAT), stamp duty, state excise, land revenue and profession
tax are levied by the State Governments.
Local bodies are empowered to levy tax on properties, octroi and for utilities
like water supply, drainage etc.
Indian taxation system has undergone tremendous reforms during the last
decade. The tax rates have been rationalized and tax laws have been simplified
resulting in better compliance, ease of tax payment and better enforcement. The
process of rationalization of tax administration is ongoing in India.
Direct Taxes
In case of direct taxes (income tax, wealth tax, etc.), the burden directly falls on
the taxpayer.
Income tax
According to Income Tax Act 1961, every person, who is an assessee and
whose total income exceeds the maximum exemption limit, shall be chargeable
to the income tax at the rate or rates prescribed in the Finance Act. Such income
tax shall be paid on the total income of the previous year in the relevant
assessment year.
Assessee means a person by whom (any tax) or any other sum of money is
payable under the Income Tax Act, and includes -
(a) Every person in respect of whom any proceeding under the Income Tax Act
has been taken for the assessment of his income (or assessment of fringe
benefits) or of the income of any other person in respect of which he is
assessable, or of the loss sustained by him or by such other person, or of the
amount of refund due to him or to such other person;
(b) Every person who is deemed to be an assessee under any provisions of the
Income Tax Act;

(c) Every person who is deemed to be an assessee in default under any provision
of the Income Tax Act.
Where a person includes:
IndividualHindu Undivided Family (HUF)Association of persons (AOP)Body
of individuals (BOI)CompanyFirmA local authority and,Every artificial judicial
person not falling within any of the preceding categories.
Income tax is an annual tax imposed separately for each assessment year (also
called the tax year). Assessment year commences from 1st April and ends on
the next 31st March.
The total income of an individual is determined on the basis of his residential
status in India. For tax purposes, an individual may be resident, nonresident or
not ordinarily resident.
Resident
An individual is treated as resident in a year if present in India:
1. For 182 days during the year or
2. For 60 days during the year and 365 days during the preceding four years.
Individuals fulfilling neither of these conditions are nonresidents. (The rules are
slightly more liberal for Indian citizens residing abroad or leaving India for
employment abroad.)
Resident but not Ordinarily Resident
A resident who was not present in India for 730 days during the preceding seven
years or who was nonresident in nine out of ten preceding years is treated as not
ordinarily resident.
Non-Residents
Non-residents are taxed only on income that is received in India or arises or is
deemed to arise in India. A person not ordinarily resident is taxed like a non-
resident but is also liable to tax on income accruing abroad if it is from a
business controlled in or a profession set up in India.
Non-resident Indians (NRIs) are not required to file a tax return if their income
consists of only interest and dividends, provided taxes due on such income are
deducted at source. It is possible for non-resident Indians to avail of these

special provisions even after becoming residents by following certain
procedures laid down by the Income Tax act.
StatusIndian IncomeForeign IncomeResident and ordinarily
residentTaxableTaxableResident but not ordinary residentTaxableNot
taxableNon-ResidentTaxableNot taxable
Personal Income Tax
Personal income tax is levied by Central Government and is administered by
Central Board of Direct taxes under Ministry of Finance in accordance with the
provisions of the Income Tax Act.
Rates of Withholding Tax
To view tax rates applicable in India under Avoidance of Double Taxation
(ADT) agreement Click here
Tax upon Capital Gains
Corporate tax
Definition of a company
A company has been defined as a juristic person having an independent and
separate legal entity from its shareholders. Income of the company is computed
and assessed separately in the hands of the company. However the income of
the company, which is distributed to its shareholders as dividend, is assessed in
their individual hands. Such distribution of income is not treated as expenditure
in the hands of company; the income so distributed is an appropriation of the
profits of the company.
Residence of a company
A company is said to be a resident in India during the relevant previous year
if:It is an Indian companyIf it is not an Indian company but, the control and the
management of its affairs is situated wholly in IndiaA company is said to be
non-resident in India if it is not an Indian company and some part of the control
and management of its affairs is situated outside India.
Corporate sector tax
The taxability of a company's income depends on its domicile. Indian
companies are taxable in India on their worldwide income. Foreign companies
are taxable on income that arises out of their Indian operations, or, in certain

cases, income that is deemed to arise in India. Royalty, interest, gains from sale
of capital assets located in India (including gains from sale of shares in an
Indian company), dividends from Indian companies and fees for technical
services are all treated as income arising in India. Current rates of corporate tax.
Different kinds of taxes relating to a company
Minimum Alternative Tax (MAT)
Normally, a company is liable to pay tax on the income computed in accordance
with the provisions of the income tax Act, but the profit and loss account of the
company is prepared as per provisions of the Companies Act. There were large
number of companies who had book profits as per their profit and loss account
but were not paying any tax because income computed as per provisions of the
income tax act was either nil or negative or insignificant. In such case, although
the companies were showing book profits and declaring dividends to the
shareholders, they were not paying any income tax. These companies are
popularly known as Zero Tax companies. In order to bring such companies
under the income tax act net, section 115JA was introduced w.e.f assessment
year 1997-98.
A new tax credit scheme is introduced by which MAT paid can be carried
forward for set-off against regular tax payable during the subsequent five year
period subject to certain conditions, as under:-
When a company pays tax under MAT, the tax credit earned by it shall be an
amount, which is the difference between the amount payable under MAT and
the regular tax. Regular tax in this case means the tax payable on the basis of
normal computation of total income of the company.MAT credit will be
allowed carry forward facility for a period of five assessment years immediately
succeeding the assessment year in which MAT is paid. Unabsorbed MAT credit
will be allowed to be accumulated subject to the five-year carry forward limit.In
the assessment year when regular tax becomes payable, the difference between
the regular tax and the tax computed under MAT for that year will be set off
against the MAT credit available.The credit allowed will not bear any interest
Fringe Benefit Tax (FBT)
The Finance Act, 2005 introduced a new levy, namely Fringe Benefit Tax
(FBT) contained in Chapter XIIH (Sections 115W to 115WL) of the Income
Tax Act, 1961.
Fringe Benefit Tax (FBT) is an additional income tax payable by the employers
on value of fringe benefits provided or deemed to have been provided to the

employees. The FBT is payable by an employer who is a company; a firm; an
association of persons excluding trusts/a body of individuals; a local authority; a
sole trader, or an artificial juridical person. This tax is payable even where
employer does not otherwise have taxable income. Fringe Benefits are defined
as any privilege, service, facility or amenity directly or indirectly provided by
an employer to his employees (including former employees) by reason of their
employment and includes expenses or payments on certain specified heads.
The benefit does not have to be provided directly in order to attract FBT. It may
still be applied if the benefit is provided by a third party or an associate of
employer or by under an agreement with the employer.
The value of fringe benefits is computed as per provisions under Section
115WC. FBT is payable at prescribed percentage on the taxable value of fringe
benefits. Besides, surcharge in case of both domestic and foreign companies
shall be leviable on the amount of FBT. On these amounts, education cess shall
also be payable.
Every company shall file return of fringe benefits to the Assessing Officer in the
prescribed form by 31st October of the assessment year as per provisions of
Section 115WD. If the employer fails to file return within specified time limit
specified under the said section, he will have to bear penalty as per Section
271FB.
The scope of Fringe Benefit Tax is being widened by including the employees
stock option as fringe benefit liable for tax. The fair market value of the share
on the date of the vesting of the option by the employee as reduced by the
amount actually paid by him or recovered from him shall be considered to be
the fringe benefit. The fair market value shall be determined in accordance with
the method to be prescribed by the CBDT.
Dividend Distribution Tax (DDT)
Under Section 115-O of the Income Tax Act, any amount declared, distributed
or paid by a domestic company by way of dividend shall be chargeable to
dividend tax. Only a domestic company (not a foreign company) is liable for the
tax. Tax on distributed profit is in addition to income tax chargeable in respect
of total income. It is applicable whether the dividend is interim or otherwise.
Also, it is applicable whether such dividend is paid out of current profits or
accumulated profits.
The tax shall be deposited within 14 days from the date of declaration,
distribution or payment of dividend, whichever is earliest. Failing to this

deposition will require payment of stipulated interest for every month of delay
under Section115-P of the Act.
Rate of dividend distribution tax to be raised from 12.5 per cent to 15 per cent
on dividends distributed by companies; and to 25 per cent on dividends paid by
money market mutual funds and liquid mutual funds to all investors.
Banking Cash Transaction Tax (BCTT)
The Finance Act 2005 introduced the Banking Cash Transaction Tax (BCTT)
w.e.f. June 1, 2005 and applies to the whole of India except in the state of
Jammu and Kashmir.BCTT continues to be an extremely useful tool to track
unaccounted monies and trace their source and destination. It has led the
Income Tax Department to many money laundering and hawala transactions.
BCTT is levied at the rate of 0.1 per cent of the value of following "taxable
banking transactions" entered with any scheduled bank on any single day:
Withdrawal of cash from any bank account other than a saving bank account;
andReceipt of cash on encashment of term deposit(s).
However,Banking Cash Transaction Tax (BCTT) has been withdrawn with
effect from April 1, 2009.
Securities Transaction Tax (STT)
Securities Transaction Tax or turnover tax, as is generally known, is a tax that is
leviable on taxable securities transaction. STT is leviable on the taxable
securities transactions with effect from 1st October, 2004 as per the notification
issued by the Central Government. The surcharge is not leviable on the STT.
Wealth Tax
Wealth tax, in India, is levied under Wealth-tax Act, 1957. Wealth tax is a tax
on the benefits derived from property ownership. The tax is to be paid year after
year on the same property on its market value, whether or not such property
yields any income.
Under the Act, the tax is charged in respect of the wealth held during the
assessment year by the following persons: -
IndividualHindu Undivided Family (HUF)Company
Chargeability to tax also depends upon the residential status of the assessee
same as the residential status for the purpose of the Income Tax Act.

Wealth tax is not levied on productive assets, hence investments in shares,
debentures, UTI, mutual funds, etc are exempt from it. The assets chargeable to
wealth tax are Guest house, residential house, commercial building, Motor car,
Jewellery, bullion, utensils of gold, silver, Yachts, boats and aircrafts, Urban
land and Cash in hand (in excess of Rs 50,000 for Individual & HUF only).
The following will not be included in Assets: -
Assets held as Stock in trade.A house held for business or profession.Any
property in nature of commercial complex.A house let out for more than 300
days in a year.Gold deposit bond.A residential house allotted by a Company to
an employee, or an Officer, or a Whole
Time Director (Gross salary i.e. excluding perquisites and before Standard
Deduction of such Employee, Officer, Director should be less than Rs
5,00,000).
The assets exempt from Wealth tax are "Property held under a trust", Interest of
the assessee in the coparcenary property of a HUF of which he is a member,
"Residential building of a former ruler", "Assets belonging to Indian
repatriates", one house or a part of house or a plot of land not exceeding
500sq.mts(for individual & HUF assessee)
Wealth tax is chargeable in respect of Net wealth corresponding to Valuation
date where Net wealth is all assets less loans taken to acquire those assets and
valuation date is 31st March of immediately preceding the assessment year. In
other words, the value of the taxable assets on the valuation date is clubbed
together and is reduced by the amount of debt owed by the assessee. The net
wealth so arrived at is charged to tax at the specified rates. Wealth tax is
charged @ 1 per cent of the amount by which the net wealth exceeds Rs 15
Lakhs.
Tax Rebates for Corporate Tax
The classical system of corporate taxation is followed in India
Domestic companies are permitted to deduct dividends received from other
domestic companies in certain cases.Inter Company transactions are honored if
negotiated at arm's length.Special provisions apply to venture funds and venture
capital companies.Long-term capital gains have lower tax incidence.There is no
concept of thin capitalization.Liberal deductions are allowed for exports and the
setting up on new industrial undertakings under certain circumstances.There are
liberal deductions for setting up enterprises engaged in developing, maintaining
and operating new infrastructure facilities and power-generating units.Business

losses can be carried forward for eight years, and unabsorbed depreciation can
be carried indefinitely. No carry back is allowed.Dividends, interest and long-
term capital gain income earned by an infrastructure fund or company from
investments in shares or long-term finance in enterprises carrying on the
business of developing, monitoring and operating specified infrastructure
facilities or in units of mutual funds involved with the infrastructure of power
sector is proposed to be tax exempt.
Capital Gains Tax
A capital gain is income derived from the sale of an investment. A capital
investment can be a home, a farm, a ranch, a family business, work of art etc. In
most years slightly less than half of taxable capital gains are realized on the sale
of corporate stock. The capital gain is the difference between the money
received from selling the asset and the price paid for it.
Capital gain also includes gain that arises on "transfer" (includes sale,
exchange) of a capital asset and is categorized into short-term gains and long-
term gains.
The capital gains tax is different from almost all other forms of taxation in that
it is a voluntary tax. Since the tax is paid only when an asset is sold, taxpayers
can legally avoid payment by holding on to their assets--a phenomenon known
as the "lock-in effect."
The scope of capital asset is being widened by including certain items held as
personal effects such as archaeological collections, drawings, paintings,
sculptures or any work of art. Presently no capital gain tax is payable in respect
of transfer of personal effects as it does not fall in the definition of the capital
asset. To restrict the misuse of this provision, the definition of capital asset is
being widened to include those personal effects such as archaeological
collections, drawings, paintings, sculptures or any work of art. Transfer of
above items shall now attract capital gain tax the way jewellery attracts despite
being personal effect as on date.
Short Term and Long Term capital Gains
Gains arising on transfer of a capital asset held for not more than 36 months (12
months in the case of a share held in a company or other security listed on
recognised stock exchange in India or a unit of a mutual fund) prior to its
transfer are "short-term". Capital gains arising on transfer of capital asset held
for a period exceeding the aforesaid period are "long-term".

Section 112 of the Income-Tax Act, provides for the tax on long-term capital
gains, at 20 per cent of the gain computed with the benefit of indexation and 10
per cent of the gain computed (in case of listed securities or units) without the
benefit of indexation.
Double Taxation Relief
Double Taxation means taxation of the same income of a person in more than
one country. This results due to countries following different rules for income
taxation. There are two main rules of income taxation i.e. (a) Source of income
rule and (b) residence rule.
As per source of income rule, the income may be subject to tax in the country
where the source of such income exists (i.e. where the business establishment is
situated or where the asset / property is located) whether the income earner is a
resident in that country or not.
On the other hand, the income earner may be taxed on the basis of the
residential status in that country. For example, if a person is resident of a
country, he may have to pay tax on any income earned outside that country as
well.
Further,some countries may follow a mixture of the above two rules. Thus,
problem of double taxation arises if a person is taxed in respect of any income
on the basis of source of income rule in one country and on the basis of
residence in another country or on the basis of mixture of above two rules.
In India, the liability under the Income Tax Act arises on the basis of the
residential status of the assessee during the previous year. In case the assessee is
resident in India, he also has to pay tax on the income, which accrues or arises
outside India, and also received outside India. The position in many other
countries being also broadly similar, it frequently happens that a person may be
found to be a resident in more than one country or that the same item of his
income may be treated as accruing, arising or received in more than one country
with the result that the same item becomes liable to tax in more than one
country.
Relief against such hardship can be provided mainly in two ways: (a) Bilateral
relief, (b) Unilateral relief.
Bilateral Relief
The Governments of two countries can enter into Double Taxation Avoidance
Agreement (DTAA) to provide relief against such Double Taxation, worked out

on the basis of mutual agreement between the two concerned sovereign states.
This may be called a scheme of 'bilateral relief' as both concerned powers agree
as to the basis of the relief to be granted by either of them.
Unilateral relief
The above procedure for granting relief will not be sufficient to meet all cases.
No country will be in a position to arrive at such agreement with all the
countries of the world for all time. The hardship of the taxpayer however is a
crippling one in all such cases. Some relief can be provided even in such cases
by home country irrespective of whether the other country concerned has any
agreement with India or has otherwise provided for any relief at all in respect of
such double taxation. This relief is known as unilateral relief.
Double Taxation Avoidance Agreement (DTAA)
List of countries with which India has signed Double Taxation Avoidance
Agreement :
DTAA Comprehensive Agreements - (With respect to taxes on income)DTAA
Limited Agreements – With respect to income of airlines/ merchant
shippingLimited Multilateral AgreementDTAA Other Agreements/Double
Taxation Relief RulesSpecified Associations AgreementTax Information
Exchange Agreement (TIEA)
Indirect Taxation
Sales tax
Central Sales Tax (CST)
Central Sales tax is generally payable on the sale of all goods by a dealer in the
course of inter-state trade or commerce or, outside a state or, in the course of
import into or, export from India.
The ceiling rate on central sales tax (CST), a tax on inter-state sale of goods, has
been reduced from 4 per cent to 3 per cent in the current year.
Value Added Tax (VAT)
VAT is a multi-stage tax on goods that is levied across various stages of
production and supply with credit given for tax paid at each stage of Value
addition. Introduction of state level VAT is the most significant tax reform
measure at state level. The state level VAT has replaced the existing State Sales

Tax. The decision to implement State level VAT was taken in the meeting of
the Empowered Committee (EC) of State Finance Ministers held on June 18,
2004, where a broad consensus was arrived at to introduce VAT from April 1,
2005. Accordingly, all states/UTs have implemented VAT.
The Empowered Committee, through its deliberations over the years, finalized a
design of VAT to be adopted by the States, which seeks to retain the essential
features of VAT, while at the same time, providing a measure of flexibility to
the States, to enable them to meet their local requirements. Some salient
features of the VAT design finalized by the Empowered Committee are as
follows:
The rates of VAT on various commodities shall be uniform for all the
States/UTs. There are 2 basic rates of 4 per cent and 12.5 per cent, besides an
exempt category and a special rate of 1 per cent for a few selected items. The
items of basic necessities have been put in the zero rate bracket or the exempted
schedule. Gold, silver and precious stones have been put in the 1 per cent
schedule. There is also a category with 20 per cent floor rate of tax, but the
commodities listed in this schedule are not eligible for input tax rebate/set off.
This category covers items like motor spirit (petrol), diesel, aviation turbine
fuel, and liquor.There is provision for eliminating the multiplicity of taxes. In
fact, all the State taxes on purchase or sale of goods (excluding Entry Tax in
lieu of Octroi) are required to be subsumed in VAT or made VATable.Provision
has been made for allowing "Input Tax Credit (ITC)", which is the basic feature
of VAT. However, since the VAT being implemented is intra-State VAT only
and does not cover inter-State sale transactions, ITC will not be available on
inter-State purchases.Exports will be zero-rated, with credit given for all taxes
on inputs/ purchases related to such exports.There are provisions to make the
system more business-friendly. For instance, there is provision for self-
assessment by the dealers. Similarly, there is provision of a threshold limit for
registration of dealers in terms of annual turnover of Rs 5 lakh. Dealers with
turnover lower than this threshold limit are not required to obtain registration
under VAT and are exempt from payment of VAT. There is also provision for
composition of tax liability up to annual turnover limit of Rs. 50 lakh.Regarding
the industrial incentives, the States have been allowed to continue with the
existing incentives, without breaking the VAT chain. However, no fresh sales
tax/VAT based incentives are permitted.
Roadmap towards GST
The Empowered Committee of State Finance Ministers has been entrusted with
the task of preparing a roadmap for the introduction of national level goods and
services tax with effect from 01 April 2007.The move is towards the reduction

of CST to 2 per cent in 2008, 1 per cent in 2009 and 0 per cent in 2010 to pave
way for the introduction of GST (Goods and Services Tax).
Excise Duty
Central Excise duty is an indirect tax levied on goods manufactured in India.
Excisable goods have been defined as those, which have been specified in the
Central Excise Tariff Act as being subjected to the duty of excise.
There are three types of Central Excise duties collected in India namely
Basic Excise Duty
This is the duty charged under section 3 of the Central Excises and Salt
Act,1944 on all excisable goods other than salt which are produced or
manufactured in India at the rates set forth in the schedule to the Central Excise
tariff Act,1985.
Additional Duty of Excise
Section 3 of the Additional duties of Excise (goods of special importance) Act,
1957 authorizes the levy and collection in respect of the goods described in the
Schedule to this Act. This is levied in lieu of sales Tax and shared between
Central and State Governments. These are levied under different enactments
like medicinal and toilet preparations, sugar etc. and other industries
development etc.
Special Excise Duty
As per the Section 37 of the Finance Act,1978 Special excise Duty was attracted
on all excisable goods on which there is a levy of Basic excise Duty under the
Central Excises and Salt Act,1944.Since then each year the relevant provisions
of the Finance Act specifies that the Special Excise Duty shall be or shall not be
levied and collected during the relevant financial year.
Customs Duty
Custom or import duties are levied by the Central Government of India on the
goods imported into India. The rate at which customs duty is leviable on the
goods depends on the classification of the goods determined under the Customs
Tariff. The Customs Tariff is generally aligned with the Harmonised System of
Nomenclature (HSL).

In line with aligning the customs duty and bringing it at par with the ASEAN
level, government has reduced the peak customs duty from 12.5 per cent to 10
per cent for all goods other than agriculture products. However, the Central
Government has the power to generally exempt goods of any specified
description from the whole or any part of duties of customs leviable thereon. In
addition, preferential/concessional rates of duty are also available under the
various Trade Agreements.
Service Tax
Service tax was introduced in India way back in 1994 and started with mere 3
basic services viz. general insurance, stock broking and telephone. Today the
counter services subject to tax have reached over 100. There has been a steady
increase in the rate of service tax. From a mere 5 per cent, service tax is now
levied on specified taxable services at the rate of 12 per cent of the gross value
of taxable services. However, on account of the imposition of education cess of
3 per cent, the effective rate of service tax is at 12.36 per cent.
Union Budget 2013-14
Latest Union Budget for the year 2013-14 has been announced by the Financed
Minister Mr P.Chidambaram on 28th of February 2013.
Here are the highlights of the key features of Direct and Indiarect Tax
Proposals:
Tax Proposals
Direct Taxes
According to the Finance Minister,there is a little room to give away tax
revenues or raise tax rates in a constrained economy.No case to revise either the
slabs or the rates of Personal Income Tax. Even a moderate increase in the
threshold exemption will put hundreds of thousands of Tax Payers outside Tax
Net.However, relief for Tax Payers in the first bracket of USD 0.004 million to
USD 0.009 million. A tax credit of USD 36.78 to every person with total
income upto USD 0.009 million.Surcharge of 10 percent on persons (other than
companies) whose taxable income exceed USD 0.18 million to augment
revenues.Increase surcharge from 5 to 10 percent on domestic companies whose
taxable income exceed USD 1.84 million.In case of foreign companies who pay
a higher rate of corporate tax, surcharge to increase from 2 to 5 percent, if the
taxabale income exceeds USD 1.84 million.In all other cases such as dividend
distribution tax or tax on distributed income, current surcharge increased from 5
to 10 percent.Additional surcharges to be in force for only one year.Education

cess to continue at 3 percent.Permissible premium rate increased from 10
percent to 15 percent of the sum assured by relaxing eligibility conditions of life
insurance policies for persons suffering from disability and certain
ailments.Contributions made to schemes of Central and State Governments
similar to Central Government Health Scheme, eligible for section 80D of the
Income tax Act.Donations made to National Children Fund eligible for 100
percent deduction.Investment allowance at the rate of 15 percent to
manufacturing companies that invest more than USD 1.84 million in plant and
machinery during the period 1st April 2013 to 31st March 2015.‘Eligible date’
for projects in the power sector to avail benefit under Section 80- IA extended
from 31st March 2013 to 31st March 2014.Concessional rate of tax of 15
percent on dividend received by an Indian company from its foreign subsidiary
proposed to continue for one more year.Securitisation Trust to be exempted
from Income Tax. Tax to be levied at specified rates only at the time of
distribution of income for companies, individual or HUF etc. No further tax on
income received by investors from the Trust.Investor Protection Fund of
depositories exempt from Income-tax in some cases.Parity in taxation between
IDF-Mutual Fund and IDF-NBFC.A Category I AIF set up as Venture capital
fund allowed pass through status under Income-tax Act.TDS at the rate of 1
percent on the value of the transfer of immovable properties where
consideration exceeds USD 0.092 million. Agricultural land to be exempted.A
final withholding tax at the rate of 20 percent on profits distributed by unlisted
companies to shareholders through buyback of shares.Proposal to increase the
rate of tax on payments by way of royalty and fees for technical services to non-
residents from 10 percent to 25 percent.Reductions made in rates of Securities
Transaction Tax in respect of certain transaction.Proposal to introduce
Commodity Transaction Tax (CTT) in a limited way.Agricultural commodities
will be exempted.Modified provisions of GAAR will come into effect from 1st
April 2016.Rules on Safe Harbour will be issued after examing the reports of
the Rangachary Committee appointed to look into tax matters relating to
Development Centres & IT Sector and Safe Harbour rules for a number of
sectors.Fifth large tax payer unit to open at Kolkata shortly.A number of
administrative measures such as extension of refund banker system to refund
more than USD 918.86, technology based processing, extension of e-payment
through more banks and expansion in the scope of annual information returns
by Income-tax Department.
Indirect Taxes
No change in the normal rates of 12 percent for excise duty and service tax.No
change in the peak rate of basic customs duty of 10 perent for non-agricultural
products.

Customs
Period of concession available for specified part of electric and hybrid vehicles
extended upto 31 March 2015.Duty on specified machinery for manufacture of
leather and leather goods including footwear reduced from 7.5 to 5 percent.Duty
on pre-forms precious and semi-precious stones reduced from 10 to 2
perent.Export duty on de-oiled rice bran oil cake withdrawn.Duty of 10 percent
on export of unprocessed ilmenite and 5 percent on export on ungraded
ilmenite.Concessions to air craft maintenaince, repair and overhaul (MRO)
industry.Duty on Set Top Boxes increased from 5 to10 percent.Duty on raw silk
increased from 5 to 15 percent.Duties on Steam Coal and Bituminous Coal
equalised and 2 percent custom duty and 2 percent CVD levied on both kinds
coal.Duty on imported luxury goods such as high end motor vehicles, motor
cycles, yachts and similar vessels increased.Duty free gold limit increased to
USD 918.86 in case of male passenger and USD 1,837.47 in case of a female
passenger subject to conditions.
Excise duty
Relief to readymade garment industry. In case of cotton, zero excise duty at
fibre stage also. In case of spun yarn made of man made fibre, duty of 12
percent at the fibre stage.Handmade carpets and textile floor coverings of coir
and jute totally exempted from excise duty.To provide relief to ship building
industry, ships and vessels exempted from excise duty. No CVD on imported
ships and vessels.Specific excise duty on cigarettes increased by about 18
percent. Similar increase on cigars, cheroots and cigarillos.Excise duty on SUVs
increased from 27 to 30 percent. Not applicable for SUVs registered as
taxies.Excise duty on marble increased from USD 0.55 per square meter to USD
1.10 per square meter.Proposals to levy 4 percent excise duty on silver
manufactured from smelting zinc or lead.Duty on mobile phones priced at more
than USD 36.78 raised to 6 percent.MRP based assessment in respect of
branded medicaments of Ayurveda, Unani,Siddha, Homeopathy and bio-chemic
systems of medicine to reduce valuation disputes.
Service Tax
Maintain stability in tax regime.Vocational courses offered by institutes
affiliated to the State Council of Vocational Training and testing activities in
relation to agricultural produce also included in the negative list for service
tax.Exemption of Service Tax on copyright on cinematography limited to films
exhibited in cinema halls.Proposals to levy Service Tax on all air conditioned
restaurant.For homes and flats with a carpet area of 2,000 sq.ft. or more or of a
value of USD 0.18 million or more, which are high-end constructions, where
the component of services is greater, rate of abatement reduced from from 75 to

70 percent.Out of nearly 1.7 million registered assesses under Service Tax only
0.7 million file returns regularly. Need to motivate them to file returns and pay
tax dues. A onetime scheme called ‘Voluntary Compliance Encouragement
Scheme’ proposed to be introduced. Defaulter may avail of the scheme on
condition that he files truthful declaration of Service Tax dues since 1st October
2007.Tax proposals on Direct Taxes side estimated to yield to USD 2,444.32
million and on the Indirect Tax side USD 863.68 million.
Good and Services Tax
A sum of USD 1,653.78 million towards the first instalment of the balance of
CST compensation provided in the budget.Work on draft GST Constitutional
amendment bill and GST law expected to be taken forward.

INDIA AND AUSTRALIA TAX TREATY.

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