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Double tax pacts with GCC nations in works
June, 14th 2007

In a bid to boost trade and investment flows from the oil-rich Gulf, the government is planning to put in place comprehensive double taxation avoidance agreements (DTAAs) with members of the Gulf Cooperation Council (GCC). This will help India Inc improve business ties with the UAE, Kuwait, Saudi Arabia, Qatar, Oman and Bahrain. The move coincides with plans to conclude a free trade agreement (FTA) with GCC members.

Indians working in these countries and Indian companies providing services in GCC would be key beneficiaries of the initiative, senior government officials said. These Gulf nations have formed an economic block in the form of GCC and helping India Inc in this market is seen as a priority. The FTA with GCC also has strategic connotations, balancing Indias strengthening bonds with Asean.

Efforts are being made to implement the DTAA signed between Indian and Kuwait last year, the officials added. The pact was not made operational since internal procedures of the Kuwaiti side were not complete. The agreement would be notified soon after the authorities in Kuwait lay down detailed procedures for implementation, they added.

Cross-border trade gets a boost with a reduction in rigours of double taxation. Reduction in withholding tax, for example, could optimise costs for business through tremendous saving, said BSR & Co partner Sudhir Kapadia. In the case of Qatar, the government has proposed a review of the current DTAA. We are waiting for a respone from Qatar, officials said.

Since the UAE is a key trading partner and a lot of Indians and Indian companies work there, the government has incorporated a limitation of benefits article to prevent misuse of the DTAA between the two countries. The updated pact would be notified once UAE authorities complete their internal procedures, the sources said. The updated DTAA with the UAE allows all its residents and companies to benefit from the pact. This will be a major benefit since there was confusion on whether all UAE residents could avail of the benefits of the tax, Mr Kapadia said.

The ongoing discussions with GCC members has also resulted in updation of the DTAA with Saudi Arabia to provide a stable tax regime to NRIs living there and Indian companies operating in that country. Indian companies will not be subject to gross basis taxation in respect of services rendered by them in Saudi Arabia, the sources said. Low withholding tax of 5% on dividends would encourage India Inc to invest in Saudi Arabia, officials feel.

The finance ministry realises that fine-tuning the provisions of the existing tax treaties and the need to build new ones is the need of the outbound Indian economy and inbound investments, said Amarchand Mangaldas partner (taxation practice) Aseem Chawla.

While it is felt that there is no need to review the DTAA with Oman, there is no plan for a pact with Bahrain since it does not impose income tax.

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