Circular No. 734

Applicable rates of taxes under the Double Taxation Avoidance Agreement between India and the United Arab Emirates

What this is

Circular No. 734 was issued by the Central Board of Direct Taxes on 24 January 1996. Its subject is Applicable rates of taxes under the Double Taxation Avoidance Agreement between India and the United Arab Emirates.

This one is about a tax treaty. India’s treaties enter Indian law by notification under section 90; where the instrument below is that notification, its date decides from when the treaty may be applied, and where it is a circular, it is the Board telling its officers how it reads the treaty — which is not the same thing.

What it does

Restates the treaty rates that must be applied when deducting tax on payments to Non-Resident Indians in the United Arab Emirates: dividends at 5 per cent of the gross where the beneficial owner is a company owning at least 10 per cent of the shares of the paying company and 15 per cent in all other cases; interest at 5 per cent of the gross where paid on a loan granted by a bank carrying on bona fide banking business or a similar financial institution and 12.5 per cent in all other cases; and royalties at 10 per cent of the gross. It reminds deductors of Circular No. 728 dated 30 October 1995, that on a remittance to a treaty country tax is to be deducted at the rate in the Finance Act of the year or the treaty rate, whichever is more beneficial to the assessee, and insists that the treaty rates be strictly adhered to so that taxpayers are not harassed.

Why it was issued

Non-Resident Indians in the United Arab Emirates represented that banks and the Unit Trust of India were deducting on interest and dividends at rates higher than the treaty rates, forcing them to claim refunds, and that they were being advised to go to the Authority for Advance Rulings wherever applicability of the treaty was in issue.

Who it reaches

Non-Resident Indians resident in the United Arab Emirates
Banks and the Unit Trust of India deducting on interest and dividend paid to them
Indian payers of royalties to United Arab Emirates residents
Deductors weighing the Finance Act rate against the treaty rate

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

Applicable rates of taxes under the Double Taxation Avoidance Agreement between India and the United Arab Emirates
1. It has been represented by some Non-Resident Indians in the United Arab Emirates (UAE) that the banks and the U.T.I. have been deducting tax at source on interest and dividend incomes at rates higher than those provided in the Double Taxation Avoidance Agreement between India and the United Arab Emirates. This has forced the Non-Resident Indians to seek remedy by way of refunds. It also appears that in each of such cases where refund was due and where decision on the applicability of the DTAA was involved, they had been advised to file a petition before the Authority for Advance Rulings.
2. The Board in its Circular No. 728 dated 30th October, 1995 (see Annex) have already clarified that in case of a remittance to a country with which a Double Taxation Avoidance Agreement is in force, tax should be deducted at the rates provided in the Finance Act of the relevant year or at the rates provided in the DTAA, whichever is more beneficial to the assessee.
3. Once again it is clarified that in respect of payments to be made to the Non-Resident Indians at the UAE, tax at source must be deducted at the following rates :—
(i) Dividends :
(a) 5% of the gross amount of the dividends if the beneficial owner is a company which owns at least 10% of the shares of the company paying the dividends.
(b) 15% of the gross amount of the dividends in all other cases.
(ii) Interest :
(a) 5% of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution.
(b) 12½% of the gross amount of the interest in all other cases.
(iii) Royalties :
10% of the gross amount.
4. It is essential that the above rates which are enshrined in the DTAA between India and the UAE are strictly adhered to so as to avoid unnecessary harassment of the taxpayers.
Circular : No. 734, dated 24-1-1996.
Circular : No. 728, dated 30-10-1995.

What to watch

The lower dividend rate needs beneficial ownership by a company holding at least 10 per cent of the shares, and the lower interest rate needs a loan from a bank in bona fide banking business or a similar financial institution — neither is available on assertion.
The governing rule remains the more beneficial of the Finance Act rate and the treaty rate, so the treaty rate is not to be applied where the Act's rate is lower.
The rates are those of the India-United Arab Emirates treaty as it then stood, which has been amended since.
The circular assumes the payee is entitled to the treaty; it does not deal with proof of residence or of beneficial ownership.

Where you meet it

Where a bank or a mutual fund has deducted at the Act's rate on interest or dividend paid to a United Arab Emirates resident and a refund or a lower deduction certificate is being pursued.

← Circular No. 735 · Circular No. 733 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.