Double Tax Avoidance Agreement (DTAA) Between India and China

The Double Tax Avoidance Agreement (DTAA) between India and China aims to help taxpayers avoid paying taxes twice in both countries. The treaty now covers income tax levied by People's republic of China on individuals and enterprises, income tax levied in India, and sharing of financial information between the two countries.

DTAA Between India and China

The agreement between the Government of the People's Republic of China and the Government of the Republic of India to avoid double taxes and prevent fiscal evasion of income taxes was signed on July 18, 1994, and came into force on November 21, 1994, in New Delhi. However, the treaty was amended between the two nations through a protocol signed on November 26, 2018. The amendment changed the existing provision related to information exchange and adhered to all international standards. The tax benefits will allow businesses to invest more money in foreign firms and achieve commercial growth.

Taxes Covered Under DTAA

As per Article 2 of India China DTAA, the taxes covered under the treaty are as follows:

It regards taxes on income, tax on total income or elements of income as well as that which includes gaining taxes from alienating immovable or movable property and capital appreciation taxes.

DTAA agreement will apply to taxes that are as follows:

China (or "Chinese Tax"):

• Enterprise Income Tax 
• Individual Income Tax

India (or "Indian Tax"):

• Income tax including surcharges 

Important Points:

• This treaty applies to taxes on earnings imposed on behalf of the Contracting State, local authorities, or any political subdivision, irrespective of how they are levied.
• DTAA also applies to any substantially similar or identical taxes, applicable after the signing of the agreement in addition to existing taxes referred to above.
• The Contracting State will notify any changes to one another in their respective tax laws within a reasonable time after making changes.

India - China DTAA Tax Rates

DTAA between India and China discusses withholding tax rates on different types of income, such as interest, royalties, technical service fees and many more. Tax rates applicable are:

• Dividend: 10%
• Royalty: 10%
• Interest: 10%*

*Note: The interest or dividend income by the government of another contracting state or some specific financial institution or Reserve Bank of India, is exempt from taxes in the source country of income.

Taxation on Capital Gains Under DTAA

The India-China DTAA has provisions on capital gains under Article 13. They are:

• Gains from alienating movable property that is part of a permanent business property that an enterprise of a contracting state has in the other Contracting State is taxed in other contracting states. 
• The same applies to any movable property that pertains to a fixed base as available to residents of the Contracting State in another Contracting State to perform independent personal service, including gains from the alienation of permanent establishment, which may be taxed in the other Contracting State.
• Gains from the alienation of shares of capital stock in a corporation whose property consists primarily of immovable property located in a Contracting State may get taxed in that Contracting State. 
• Gains from the alienation of ships or planes operating in international traffic or moveable property related to their operation are taxed only in the Contracting State where the alienator resides.
• Gains originating in a Contracting State from the alienation of any property other than that referred to in the preceding paragraphs of this Article may get taxed in that Contracting State.

Significance of DTAA For India and China

DTAA between India and China is equally advantageous for the residents of India and China in claiming tax benefits and enhancing trade investments. Some major benefits the residents of each State derives from the treaty are:

• DTAA brings clarity to the working taxation systems of both nations and increases investment opportunities.
• The rules to divide revenue among one another are specified in the agreement, thus helping India and China to peacefully settle revenue matters.
• The taxpayers from either country possess clarity of their own tax liability.
• DTAA helps income tax to be deductible in both nations to some extent, ensuring that no one unjustly benefits from a lack of payment or payment of taxes.
• Lesser withholding tax in the form of lesser TDS on dividends, royalties, and interest income.
• This friendly treaty encourages international investment, trade and the free flow of technologies between China and India, as the taxation policies are transparent through this agreement.

Final Words

India-China DTAA is a crucial arrangement focusing primarily on improving trade relations between the two countries. While the present trade scenario between China and India is complicated, mainly due to different political reasons, the DTAA is at least helping businesses and individuals claim tax benefits on their foreign income. 

Moreover, Article 23 of DTAA discusses the different methods you can implement during ITR filing to eliminate double taxation for each country. Hence, you need to understand all the provisions of DTAA thoroughly to apply for the necessary policies while filling different headings under ITR and claiming the required benefits.