‘Taxable’: Historical past and Impression on Agreements

The DTAAs according to “Article 1 – Personal Scope” apply to persons who are resident in one of the two countries. Article 4 of the DTG defines the term “resident in a contracting state”. Article 4 (1) of the 2017 OECD Model Tax Convention provides, among other things, that the term “resident of a contracting state” refers to any person under the law of that state who is subject to tax there based on their domicile, domicile or abode, management or other criteria of a similar nature. It is worth noting, however, that the 2017 OECD Model Convention does not define the term “taxable”.

In almost all agreements, the determination of the place of residence according to Article 4 Paragraph 1 requires that the person is “taxable” in their country in order to claim protection against double taxation under the respective DTA. However, this term was not defined under either the DTAAs or the domestic income tax law of India.

Klaus Vogel says in his comment on the DTAAs: “If an exemption is agreed, its effect is fundamentally independent of whether the contracting state levies a tax in the situation to which the exemption applies, and regardless of whether the state” actually collects the tax …. So it is said that the agreement prevents not only a “current” but also only a “potential” double taxation … .. only in exceptional cases and only with an express agreement between the parties, an exemption in one of the contracting states is dependent on it whether the income or assets are taxed in the other contracting state or are actually taxed there. “

In the Indian context, when determining whether a person was a resident under Article 4 (1), the courts in India had to determine whether that person was “taxable” in the other country. In the absence of a definition, the Indian judgments are [except in [1999] 239 ITR 650 (AAR) & (2005) 276 ITR 306 (AAR)]have interpreted this term in such a way that “taxable” does not mean the actual tax liability or payment of taxes by a person in their country. It is sufficient for the country to have sovereign tax powers regardless of the actual exercise of these powers. “Taxable” is not to be equated with “taxable”. Based on such an interpretation, the use of DTAAs was also extended to people who did not pay taxes in their home country. For example, in the case of the India-UAE DTAA, as it stood before its amendment in 2007, it was established that the sovereign of the UAE is entitled to levy taxes even if there is no tax liability of the natural persons resident in the UAE Income of the residents there. The fact that the UAE has not exercised its sovereign power to collect taxes on natural persons cannot be a reason for an individual not to be “taxable” in the United Arab Emirates. Even a potential tax liability in the UAE would be “taxable”. On this basis, individuals have benefited from India-UAE DTAA.

Finance Act, 2020 – Recognized Residence

The 2020 Finance Act introduced the concept of “presumed residence”. Clause (1A) through Section 6 of the Income Tax Act 1961 (‘law‘) got introduced. This clause provided that if an individual who is an Indian citizen has an Indian source income in excess of fifteen lakh rupees and that individual is not taxable in any other country or territory by reason of their place of residence or residence or any other criteria of a similar nature, such a person is treated as a “resident” of India. Although the concept of “presumed residence” depended on “taxable”, the Finance Act of 2020 did not introduce a definition of this term.

Finance Act 2021 – “taxable” defined

Section 2 (29A) of the Act now defines “taxable” as the existence of an income tax liability of the person under the currently applicable laws of their country. The definition also expressly includes a person who was subsequently exempted from this liability in that country. The first part of the definition provides a condition for actual tax liability on income tax liability. Thus, the fact that the state will be able to levy taxes in the future may no longer be sufficient to qualify as “taxable”. The second part of the definition recognizes this in Azadi Bachao Andolan. laid down principle [2003] 263 ITR 706 (SC)]who is taxable does not necessarily imply actual payment of tax and specifically includes persons who are conditionally or unconditionally exempt from paying tax.

Influence on the interpretation of DTAA

The question now arises as to whether the definition of “taxable” introduced in Indian law will have an impact on the determination of residence according to the DTAA [usually Article 4(1)].

One way of thinking can be that the definition of “taxable” according to Section 2 (29A) of the Act can be read into Article 4 Paragraph 1 of the DTAA. On the one hand, the intention of the legislature in the definition of this term would have to be supported. Second, in the absence of a definition in the DTAA, reference would also be made to Article 3 (2) of the DTAA, which states that “any term not defined in this Agreement, unless the context otherwise requires, has the meaning it has” under the law of that Agreement Thirdly, Explanation 4 to Section 90 of the Act, which provides that any term not defined in the DTAAs, can also be supported , has the same meaning as assigned in the law.

Another more logical way of thinking is that in interpreting a definition of national law in the contract, one must consider the context in which the definition is provided in national law. Before any domestic legal definition is incorporated into the Treaty, Article 3 (2) requires “contextual similarity” by expressly saying “unless the context requires otherwise”. The context depends in particular on the intention of the contracting states when signing the DTA as well as the meaning given to the term in question in the legal provisions of the other contracting state.

An important principle to be aware of when interpreting the provisions of an international treaty, including a double tax remission, is that treaties are negotiated and concluded at a political level and are based on multiple considerations. The main function of a DTAA should be seen in the context of promoting trade relations between contracting parties and essentially as an agreement between two contracting states on the distribution of tax revenues between them in relation to income that is taxable in both jurisdictions. Article 31 (1) of the Vienna Convention also states: “A contract must be interpreted in good faith in accordance with the ordinary meaning of the terms of the contract in their context and in the light of their aim and purpose”.

The definition provided in the law provides for the actual collection of income tax under the law of another country. In contrast, the term “taxable” in the general sense of the DTAA does not refer to the actual levy or payment of taxes. It is sufficient if the country has sovereign powers of taxation regardless of the actual exercise of these powers. This is gaining in importance, as most of the treaties in the article “Methods to Eliminate Double Taxation” (as this title is often used) allow a crediting of taxes paid abroad, provided that the income was “taxed” there. “Subject to taxation” means that the person has actually paid the taxes abroad. For example, the agreement used two different terminologies, ie taxable versus taxpayers, in relation to two different contexts.

If the term “taxable” according to Article 4 Paragraph 1 is understood as it was defined in Section 2 (29A) of the Act, ie according to Indian income tax law, then this would equate the two terms under DTAA, ie taxable towards taxpayers. This cannot be the context of the treaty and the understanding of the two countries when the treaty would have been signed.

Therefore, the context of the definition of taxable according to Section 2 (29A) of the Act differs from the use of this term according to the DTAA and accordingly this definition cannot be included in an agreement.


Based on the discussion above, the answer to the question of whether this new definition of “taxable” can be read into the DTAA to determine “place of residence” appears with “NO”. So, as long as a person presents a valid “tax residency certificate” from a country with which India has an agreement, it can be argued that that person cannot be denied the benefits of the agreement even if that country has no income. Interestingly, this definition would have no impact on agreements with countries such as the United Arab Emirates, where residence is determined by the number of days in the United Arab Emirates rather than by tax liability in the United Arab Emirates.