- The Union Cabinet approved a revised Double Tax Avoidance Agreement (DTAA) and the Prevention of Fiscal Evasion with respect to Taxes on Income between India and Cyprus.
- The revised DTAA provides for source-based taxation of capital gains on transfer of shares instead of one based on residence.
- Thus, it is considered as a major step in the fight against tax evasion, round tripping and base erosion/profit shifting. It also allows India to have the right to tax capital gains arising in India.
- It further removes distortion caused by the provisions in the earlier treaty for residence-based taxation for the sake of avoiding tax.
Background:
• India and Cyprus had signed DTAA in 1994. Cyprus is a major source of foreign funds flows in India. From April 2000 till March 2016, India received foreign direct investment (FDI) to the tune of Rs 42,680.76 crore from Cyprus.
• Cyprus is considered a major haven for money laundering, round-tripping, and profit-shifting. The revised DTAA assumes significance coming soon after the signing of the revised pact with Mauritius.
What is Double Taxation Avoidance Agreement (DTAA)?
• A DTAA is a bilateral economic agreement between two nations that aims to avoid or eliminate double taxation of the same income in two countries. It is also referred to as a Tax Treaty.
