Double Tax Avoidance Agreement (DTAA) Between India and Malaysia

World trade, exports, imports, and foreign investments are central to developing all world economies. However, when business people and individuals venture into the international market, they are taxed in two countries on the same income. To overcome such issues and encourage two-party economic relations, countries sign Double Tax Avoidance Agreements (DTAA). The DTAA between India and Malaysia is among the most essential among such treaties.

This all-encompassing blog provides an exhaustive analysis of the India-Malaysia DTAA, which includes the treaty's provisions, the tax rates, and the effect on different kinds of income. For anyone who is a cross-border worker or a firm wanting to enter new countries, it is essential to be familiar with this agreement as it will help enhance your taxation status while at the same time being compliant with international taxation laws.

DTAA Between India and Malaysia

The history of the India-Malaysia DTAA started on May 14, 1970, when the two nations initiated the first agreement. However, it has been seen that with the changing economic geography and new forms of competition and business strategies replacing the old ones, there was a felt need to have a new agreement in place. Understanding this, India and Malaysia entered into a revised DTAA on May 9, 2012, which was made operative on April 1, 2013.

This new agreement indicates the shifting international taxation practices and is based on the norms set by international organizations, including the OECD(Organization for Economic Cooperation and Development). It deals with contemporary commerce and some elements, such as e-commerce and digital services, which were absent when the initial treaty was concluded.

The proposed changes in the DTAA are intended to increase the clarity of the tax systems and improve their efficiency for those carrying out their activities in the mentioned countries. This means that it shows how various kinds of income should be taxed, thus minimizing the controversies that may arise between the taxpayers and the tax administrators.

Significance of India - Malaysia DTAA for Both Countries

The DTAA between India and Malaysia is of tremendous importance for both countries, providing comprehensive benefits for enhancing bilateral relations and investment between the two countries. 

Elimination of Double Taxation

The principal objective of DTAA is to avoid double taxation, but it is not limited to this. This is done through phenomena like tax credits and exemptions. Suppose an Indian firm is making profits from its business activities in Malaysia. In that case, the DTAA ensures that such profits will not be taxed twice in India and Malaysia. 

Reduction of Tax Evasion

Some of the agreement sections deal with sharing information between the respective tax authorities of the two nations. This makes detecting and preventing tax evasion cases easier so that every citizen and business meets its tax responsibilities in the two countries. 

Promotion of Foreign Investment

The DTAA helps break the fog over tax responsibilities and the possibility of being taxed twice, thus boosting cross-border investments. Companies from Malaysia and India feel more secure about investing in each other’s countries as they are assured that they will not be subjected to any unfair tax regimes. 

Clarity on Tax Liabilities

 The DTAA also lays down a precise mechanism for taxing various kinds of income. This results in better anticipation of cash flows in the business or individual’s financial plan and minimizes the chances of conflict with the tax offices. 

Enhancement of Bilateral Trade Relations

This enhances the environment of trade relations between India and Malaysia and makes them preferable states. It erases tax obstructions and allows the organization to be more flexible. The company can now easily engage in import-export business, establish subsidiaries, or partner with other companies in the other country. 

Taxes Covered Under DTAA

Knowing which taxes are governed by the India-Malaysia DTAA is informative for anyone working in these countries. The agreement specifically addresses the following taxes:

For India

1. Income Tax
2. Surcharge on Income Tax

For Malaysia

1. Income Tax
2. Petroleum Income Tax

These taxes ensure the DTAA covers all income-earner activities between the two countries. However, one should remember that some local taxes or levies may be excluded from this treaty. 

India Malaysia DTAA Tax Rates

One essential condition of the India-Malaysia DTAA is the determination of the reduced rate of taxation for various types of income. These rates are usually slightly below the domestic tax rates in either country, which boosts cross-border trading. Let's explore the tax rates for different income categories: 

Dividends

The dividends is taxed at 5% for the person residing in one state and receiving dividends from a company in another state

Interest

Interest income is taxed at a rate of at most 10% of the gross amount of interest received. This applies to any interest, such as government securities, bonds, or debentures. 

Royalties

Royalties are charged for using or suitable to use any copyright, patent, trademark, design, model, plan, secret formula, or process. They are subject to a maximum tax rate of 10% of the gross amount. 

Fees for Technical Services

Like royalties, fees for technical services are taxed at a rate that does not exceed 10% of the gross amount. This category consists of payments for managers, technicians, or consultants. 

Taxation on Capital Gains Under DTAA

The taxation of capital gains is one of the most important provisions of the India-Malaysia DTAA, given the impact of taxes on investment and asset deals. The agreement provides specific rules for different types of assets: 

Immovable Property

Profits emerging from the sale or disposal of any form of fixed assets, for instance, land or buildings, can be taxed in the country where the asset is located. This provision addresses the rights of the source country to impose taxes on the gains arising from the disposal of immovable property in that country. 

Shares

The taxation of gains from the alienation of shares depends on the nature of the company whose shares are being sold.

• If the shares obtain more than half of their value from immovable property in any listed country, the country in which immovable property is located has the right to tax the capital gains.  
• The source country can tax the capital gains for other shares. 

Movable Property

Profits derived from the alienation of movable property, which is part of the business property of a permanent establishment or fixed base, are taxable in the country of the place of the establishment or the base. 

Ships and Aircraft

Profits derived from ships or aircraft used in the operation of international traffic are subject to tax only in the state of residence of the enterprise using the said ships or planes. 

Other Property

Profits resulting from the alienation of any property other than those enumerated are taxable only in the country of the seat of the alienator. 

Taxation on Employment Income under DTAA

The India-Malaysia DTAA also contains detailed provisions regarding the taxation of employment income, which is pertinent in today's cross-border workforce environment. These provisions provide jurisdiction on which country can tax the income and under what circumstances. Let's explore the key aspects:

General Rule

Any remuneration in the form of salary, wages, and similar items received by a resident of one country about employment is taxable only in the first-mentioned country, provided that the job is carried out in the other country. If the employment is exercised in another country, the payments arising from the employment may be subjected to taxation in that country. 

 For instance, if an Indian resident carries on business in Malaysia, Malaysia is entitled to tax income derived by the resident from that employment. 

Short-term Assignments

The DTAA makes an exception for short-term business assignments. Remuneration derived by a resident of one country for employment exercised in the other region is taxable only in the first country if: 

• The recipient is in the other country for a period or periods during the fiscal year in question that does not in the aggregate exceed 183 days in any twelve months, whether at the commencement or the end of such period. 
• The remuneration is paid by or on behalf of an employer, not a resident of another country. 
• The remuneration is for services not connected with a permanent establishment or fixed base the employer has in another country. 

Directors' Fees

Remuneration of Directors and other similar amounts paid to a resident of one of the Contracting Jurisdictions for services as a member of the board of directors of a company resident in the other Contracting Jurisdiction may be taxed in the latter Contracting Jurisdiction. 

Entertainers and Sportspersons

Income earned by entertainment like theatre, motion picture, radio, or television artists or musicians or athletes for their activities performed in another country can be taxed in that country irrespective of the period of stay. 

Government Service

Earnings such as salaries, wages, and any sums paid by the government of one country to an individual for services in that country are taxed only in that country. However, such remuneration is taxable only in the other country if the services are rendered in that country, and the individual is a resident of that country or a national of that country or became a resident of that country for the sole purpose of rendering the services. 

Final Word

The application of double tax avoidance between the two countries has been evidenced by the agreement reached between the two countries as a clear implication of a cordial business relationship between the two nations. It contains provisions on business profits, capital gains, employment income, royalties, etc.  

The DTAA also helps clarify matters of tax jurisdiction and offers lower tax rates for some types of income, which minimizes the tax burden to individuals and companies operating in both countries. It also does away with the possibility of double taxation, which is, in most cases, a significant put-off for international business entities. 

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