Double Tax Avoidance Agreement (DTAA) Between India and Japan

DTAA or Double Tax Avoidance Agreement, is a tax treaty between two or more countries. The main objective behind signing this treaty is to avoid taxing the same income twice. If a non-resident Indian is residing in another country and earning there, the tax applicable comes under the consideration of DTAA. While signing the agreement, both contracting states decide on the tax rates and jurisdictions for income arising from both nations. 

India has signed DTAAs with almost 100 countries. DTAAs are beneficial for NRIs and help resolve inconsistencies in tax collection from non-residents. Keep reading to learn more about the DTAA between India and Japan.

What is DTAA between India and Japan?

The Government of India and the Government of Japan came to the decision to sign a Double Tax Avoidance Agreement in 1990. This agreement ensures that non-resident Indians can avoid double taxation on income and reduce tax evasion. According to the powers bestowed by section 90 of the Income Tax Act of 1961, the Central Government of India permits the said rules in this agreement.

Residents of a contracting state get a deduction in a contracting state if they pay tax on their income in the other contracting state. There are a total of 29 Articles in this DTAA. These articles mainly discuss the definition, the scope of the agreement, taxation on income, technique of elimination, etc. 

Significance of India Japan DTAA for Both Countries

Every country decides the rate of tax on income generated in their territory, keeping certain factors in mind. These include the location of the source, maintenance of permanent establishment residence of the taxable entity, etc. When there are two taxation systems belonging to two different countries applicable to one taxpayer, there might be instances of double taxation. 

This convention makes sure that such a thing does not happen. Residents of both India and Japan can take advantage of the benefits that the agreement is offering. Here are some benefits that residents of both contracting states can opt for:

• This agreement encourages investment in developing countries as there is legal certainty in DTAAs. The DTAA makes sure that specific rules applicable for taxing international income are applicable.
• Reduces the possibility of tax evasion in both contracting states. 
• This convention offers relief in the form of tax exemption on income that foreign residents earn in other contracting states. Relief of tax exemption is applicable on the income for which payment of tax has already been completed in the other contracting state.
• Lower withholding tax for taxpayers in the form of lower TDS on income from interest, dividends, royalties and fees for technical services.
• DTAA makes sure that genuine residents of the contracting states get the benefits of the agreement. This is due to the applicability of anti-abuse provisions discussed in DTAA.

Taxes Covered under DTAA

Article 2 in the DTAA between India and Japan covers details regarding taxes which are subject to this convention. Here is the list of taxes that fall under the agreement of DTAA:

In Japan (Japanese tax)

• Income tax
• Corporation tax

In India

• Income tax along with surcharge applicable on it

Apart from these taxes mentioned above, any other similar or identical taxes which are applicable after the date of signature of the agreement will also be considered in the agreement. Respective authorities of contracting states need to notify about any substantial changes that have taken place in their taxation system within a reasonable period of time after the change.

India Japan DTAA TDS Rates

When a person or a company makes a payment to a non-resident, a portion is withheld at the payment source. This is tax deducted at source or TDS. As per rates discussed in the convention, a resident of any contracting state is liable to get a tax deduction.

Let us take a look at the withholding tax rate applicable to income from different sources:

• According to Article 10 of DTAA between India and Japan, withholding tax applicable on dividend income cannot exceed 10% of gross income. 
• As per Article 11 of DTAA, in case of interest income, the tax applicable should not exceed 10% of gross income. 
• As per Article 12 of DTAA, in case a resident of a contracting state earns royalties or fees for technical services, the tax rate cannot exceed 10% of gross income. 

The TDS rate applicable as per DTAA between India and Japan is 10% of the amount residents of both countries receive.

Taxation on Capital Gains under DTAA

Capital gains earned by residents in contracting states is taxable as per rules present in Article 13 of DTAA between India and Japan. Below is a list of rules applicable in case of capital gains of different types in India-Japan DTAA:

• Income from the alienation of immovable property that is either livestock or equipment for agricultural and forestry use is taxable in the state where it is situated.
• Capital gains from movable property in one contracting state that is used for business purposes in the other contracting state will be taxable in the other contracting state.
• Gains from the alienation of ships or aircraft that are operational in international traffic are taxable in the state where the business is operational.
• Capital gains from the alienation of shares of a company which is operational in the other contracting state will be taxable in that state only.
• Lastly, capital gains from any other type of property that those discussed above will be taxable in that contracting state.

Final Words

The application process for availing DTAA benefits is quite simple. For this, you will require documents like a PAN card copy, a Person of Indian Origin proof copy, a passport, a Visa, a Tax Residency certificate and a self-declaration.

Now that you are aware of the rules and regulations present in DTAA between India and Japan, you can invest freely. However, you need to keep in mind that you cannot invest just for the sake of saving taxes and opting for the benefits of DTAA.

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