The FAQs have been prepared by Ananya Mankoo, a 2nd-year Law student at Queen Mary University of London, UK. She is currently interning with LatestLaws.com.
INTRODUCTION:
The UK-India double convention was signed between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of India. This convention was signed between the two governments for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains.
This agreement was signed on 25th January 1993 but was entered into force on 25th October 1993. It was effective in United Kingdom from 1st January 1994 in respect of petroleum revenue tax, from 1st April 1994 for corporation tax and from 6th April 1994 for income tax and capital gains tax. In India it was effective from 1st January 1994.
Q1. WHAT IS THE SCOPE OF THE CONVENTION?
The convention applies to all persons who are residents of one or both of the contracting states. This convention extends to the territory of each contracting state, including its territorial sea and to all those areas of the exclusive economic zone or the continental shelf that is adjacent to the outer limit of the territorial sea of each state over which it has in relation to the international law.
Q2. WHAT IS THE USE OF THIS CONVENTION?
This convention on avoidance of double taxation to streamline the provisions on partnerships and dividends as well as information flow between the tax authorities of the two countries. This convention would render tax stability to the residents of India and the UK and would ease economic cooperation between the two countries. It would also ease the flow of investment, technology and services between India and the UK. The partners of UK partnerships would also be given benefits. Further, the withholding taxes on the dividends would be 10 per cent or 15 per cent and would be equally applicable in the UK and in India[1].
Q3. WHICH ALL TAXES ARE COVERED IN THIS CONVENTION?
Different taxes are covered in the United Kingdom and in India.
In the United Kingdom the following taxes are covered:
- the income tax
- The corporation tax
- The capital gains tax
- The petroleum revenue tax
In India, the income tax including any surcharge thereon is covered in this convention. The convention shall also apply to any similar or substantially similar taxes which are imposed by either the contracting state after the date of signature of the convention in addition to the taxes of the other contracting state. The authorities of the contracting states are required to notify each other of any substantial changes that are made in their respective taxation laws.
Q4. HOW MANY ARTICLES DOES THIS CONVENTION COMPRISE OF?
This convention comprises of 31 Articles in total starting from the scope of convention which talks about where the convention extends to the termination of the convention. All the articles talk in detail about the procedures and rules and regulations that everyone must adhere to in regards of the convention.
Q5. WHAT ARE THE IMPORTANT TERMS MENTIONED IN THE AGREEMENT?
The agreement contains a few important definitions just to avoid any confusion in regards of the regulations mentioned in the agreement.
- The term “tax” means United Kingdom tax or Indian tax, as the context requires but shall not include any amount which is payable in respect of any default or omission in relation to the taxes to which this convention applies or which represents a penalty imposed relating to those taxes;
- The term “fiscal year” in relation to Indian tax means “previous year” as defined in the Income-tax act 1961. In relation to UK tax it means a year beginning with 6th April in one year and ending with 5th April in the following year;
- The terms “a contracting state” and “the other contracting state” mean India or the UK, as required;
- The term "person" includes an individual, a company and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States;
- The term "company" means any body corporate or any entity which is treated as a company or body corporate for tax purposes;
- The term "Government" means the Government of a Contracting State or a political subdivision or local authority thereof. In relation to the United Kingdom, the term "political subdivision" shall include Northern Ireland.
Any partnership that is treated as a taxable unit under the Income-tax Act 1961 of India shall be treated as a person for the purposes of this convention.
Q6. WHAT IS THE PROCEDURE OF BRINGING THE CONVENTION INTO FORCE?
Each of the contracting states have to notify to the other of the completion procedures required by its law for bringing this Convention into force. This convention shall enter into force on the date of the later of these notifications and shall thereupon have effect:
In the UK:
- In regard to income tax and capital gains tax for any year of assessment beginning on or after 6th April in the calendar year next following that in which the later of the notifications is given;
- In regard to corporation tax, for any financial year beginning on or after 1st April in the calendar year next following that in which the later of the notifications is given;
- In regard to petroleum revenue tax, for any chargeable period beginning on or after 1st January in the calendar year next following that in which the later of the notifications is given.
In India, in regards to the income arising in any fiscal year beginning on or after the first day of April in the next following year where the notifications are later given. Where any provisions of the 1981 Convention would have afforded any greater relief from tax than is due under this Convention, any such provision as aforesaid shall continue to have effect:
- In the UK, any year of assessment or financial year and
- In India, for any fiscal year;
Beginning, in either case, before the entry into force of this convention.
Q7. WHAT DOES “FISCAL DOMICILE” MEAN?
This is Article 4 of the convention, which talks about fiscal domicile. For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.
If an individual is resident of both the contracting states, then his status is determined by the following rules:
- he shall be considered to be a resident of the Contracting State in which he has a permanent home available to him. If he has a permanent home available to him in both the Contracting States then he shall be considered to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);
- if the Contracting State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either Contracting State, he shall be considered to be a resident of the Contracting State in which he has an habitual abode;
- if he has an habitual abode in both Contracting States or in neither of them, he shall be considered to be a resident of the Contracting State of which he is a national;
- if he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
By reason of the provisions of this article, a person other than the individual who is a resident of both contracting states, then it shall be deemed to be a resident of the contracting state in which its place of effective management is situated.
Q8. WHAT DOES THE CONVENTION SAY ABOUT PENSIONS AND OTHER GOVERNMENT REMUNERATIONS?
Article 19 of the convention talks about pensions and government remunerations. The remuneration, other than the pension which is paid by the Government of a contracting state to any individual who is a national of that state in respect of services provided in the discharge of governmental functions in the other contracting state shall be exempt from tax in that other contracting state. Any pension paid by the government of a contracting state to any individual in respect of services provided to that government shall be taxable only in that contracting state.
The provisions of this Article shall not apply to remuneration or pensions in respect of services rendered in connection with any trade or business.
Q9. WHAT DOES THIS CONVENTION MENTION ABOUT STUDENTS, TRAINEES AND TEACHERS?
ARTICLE 21- An individual who is a resident of a Contracting State or was a resident of that State immediately before visiting the other Contracting State and who is temporarily present in that other State for the main purpose of:
- studying at a university or other accredited or recognised educational institution in that other Contracting State; or
- studying at a university or other accredited or recognised educational institution in that other Contracting State; or
- studying or doing research as a recipient of a grant, allowance, or award from a governmental, religious, charitable, scientific, literary or educational organisation;
Shall not be subject to tax by that other Contracting State in respect of:
(i) gifts from abroad for the purposes of his maintenance, education, study, research or training;
(ii) the grant, allowance or award; and
(iii) income from personal services provided in that other Contracting State (other than any provided by an article clerk or other person undergoing professional training to the person or partnership to whom he is articled or who is providing the training) not exceeding the sum of 750 pounds sterling or its equivalent in Indian currency during any fiscal year.
An individual who is a resident of a Contracting State or was a resident of that State immediately before visiting the other Contracting State and who is temporarily present in that other State for a period not exceeding 12 months, as an employee of, or under contract with, a resident of the first-mentioned Contracting State, for the primary purpose of:
- acquiring technical, professional or business experience from a person other than that resident of the first-mentioned Contracting State; or
- Studying at some university or institution in the other contracting state.
Shall not be subject to tax by that other contracting state on his income from personal services undertaken in the other contracting state for that time in an amount not exceeding 1500 pounds sterling or its equivalent in indian currency.
ARTICLE 22- An individual who visits a Contracting State for a period not exceeding two years for the purpose of teaching or engaging in research at a university, college or other recognised educational institution in that State, and who was immediately before that visit a resident of the other Contracting State, shall be exempted from tax by the first- mentioned Contracting State on any remuneration for such teaching or research for a period not exceeding two years from the date he first visits that State for such purpose.
This Article shall only apply to income from research if such research is undertaken by the individual in the public interest and not primarily for the benefit of some other private person or persons.
Q10. WHAT IS THE “ELIMINATION OF DOUBLE TAXATION”?
Article 24 talks about the elimination of double taxation.
Subject to the provisions of the law of the United Kingdom regarding the allowance as a credit against United Kingdom tax of tax payable in a territory outside the United Kingdom:
- Indian tax payable under the laws of India and in accordance with the provisions of this Convention, whether directly or by deduction, on profits, income or chargeable gains from sources within India (excluding, in the case of a dividend, tax payable in respect of the profits out of which the dividend is paid) shall be allowed as a credit against any United Kingdom tax computed by reference to the same profits, income or chargeable gains by reference to which the Indian tax is computed.
- In the case of a dividend paid by a company which is a resident of India to a company which is a resident of the United Kingdom and which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividend, the credit shall take into account the Indian tax that is payable by the company in respect of the profits out of which the sub dividend is paid.
Subject to the provisions of the law of India regarding the allowance as a credit against Indian tax of tax paid in a territory outside India (which shall not affect the general principle hereof), the amount of the United Kingdom tax paid, under the laws of the United Kingdom and in accordance with the provisions of this Convention, whether directly or by deduction, by a resident of India, in respect of income from sources within the United Kingdom which has been subjected to tax both in India and the United Kingdom 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.
Q11. WHAT ARE THE EFFECTS OF THIS CONVENTION ON PARTNERSHIPS?
Where, under any provision of this convention, a partnership is entitled as a resident of India, to exempt from tax in the UK on any income or capital gains, that provision shall not be construed as restricting the right of the United Kingdom to tax any member of the partnership who is a resident of the UK on his share of the income and capital gains of the partnership.
The Convention shall entitle a partnership where the person is a resident of India to a tax credit in respect of dividends paid to the partnership by a company which is a resident of the United Kingdom; but any member of the partnership who is a resident of India shall be regarded as entitled to the tax credit to which he would have been entitled under that Article, if his share of those dividends has been paid to him by the company which is a resident of the United Kingdom.
Q12. HOW CAN THIS CONVENTION BE TERMINATED?
This Convention shall remain in force until terminated by one of the Contracting States. Either Contracting State may terminate the Convention, through the diplomatic channel, by giving notice of termination at least six months before the end of any calendar year beginning after the expiration of ten years from the date of entry into force of the Convention. In such a case, the convention shall cease to have any effect:
In the United Kingdom :
(i) in respect of income tax and capital gains tax, for any year of assessment beginning on or after 6th April in the calendar year next following that in which the notice is given;
(ii) in respect of corporation tax, for any financial year beginning on or after 1st April in the calendar year next following that in which the notice is given;
(iii) in respect of petroleum revenue tax, for any chargeable period beginning on or after 1st January in the calendar year next following that in which the notice is given;
- In India, in respect of income arising in any fiscal year beginning on or after the first day of April in the following calendar year in which the notice was given.
