SYLLABUS
GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
Context: Recently, the Governments of India and France signed a protocol to amend the India–France Double Taxation Avoidance Convention, aligning it with evolving international tax standards to boost investment and ensure tax certainty.
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• The protocol was signed during the visit of the French President to India, reflecting strengthened bilateral economic cooperation.
• The original India–France Double Taxation Avoidance Convention (DTAC) was signed on 29 September 1992 and came into force on 1 August 1994.
• The newly signed protocol updates the treaty framework in line with contemporary international tax norms.
Key Highlights of the Amendment to the India–France DTAC
• Most-Favoured-Nation (MFN) Clause Deletion: The MFN clause has been officially removed.
- Previously, this clause allowed France to claim lower tax rates if India offered better terms to another OECD country.
- The removal follows a landmark Supreme Court ruling (e.g., Nestlé SA case) stating MFN benefits cannot be automatically invoked without a specific government notification.
• Capital Gains Taxation: The Amending Protocol provides full taxing rights in respect of capital gains from the sale of company shares to the source country (where the company is resident).
• Taxation of Dividends: Replaces the single 10% rate with a split-rate structure.
- 5% tax: For investors holding at least 10% of a company’s capital.
- 15% tax: For all other cases.
• Modification of ‘Fees for Technical Services’ (FTS) Definition: Aligns the definition of FTS with the provisions of the India–US Double Taxation Avoidance Agreement.
• Expansion of Permanent Establishment (PE) Scope
- Introduces the concept of “Service PE.”
- Expands the scope of taxation of business profits arising from cross-border service activities.
• Updated Exchange of Information Provisions
- Modernizes provisions relating to the exchange of information in accordance with international standards.
- Strengthens cooperation between India and France in combating tax evasion and avoidance.
• New Article on Assistance in Collection of Taxes: A new article on assistance in collection of taxes enables each country to help the other in recovering tax claims, thereby strengthening cross-border enforcement and compliance.
• Incorporation of BEPS Multilateral Instrument (MLI) Provisions: Integrates applicable provisions of the BEPS MLI into the DTAC.
- The Base Erosion and Profit Shifting (BEPS) Multilateral Instrument (MLI) is a global treaty designed to modernise the existing network of bilateral tax treaties (DTAAs) to prevent tax avoidance by multinational corporations.
Significance of the India-France Double Taxation Avoidance Convention (DTAC)
• Source-Based Taxation: By allocating capital gains taxation on shares to the company’s state of residence, the protocol firmly secures India’s taxing rights over gains from shares of Indian companies held by French investors, curbing treaty shopping opportunities.
• Removal of Ambiguity: By deleting the MFN clause, it eliminates long-standing legal disputes regarding whether lower rates from other OECD treaties could be “imported” into the India–France agreement.
• Digital & Service Modernisation: The introduction of Service PE and India–US style FTS language modernises the treaty for service and knowledge-intensive business models, aligning it with India’s newer treaty practice and international norms.