Indo-Australian Trade Links and the Income Tax Hurdles

Abstract

Of late, there is a significant awareness of the possible improvement of the bilateral trade relations between India and Australia. Several Australian companies appear to be eager to invest in India particularly, in the key sectors, such as mining, agri-business, infrastructure and power. Yet, trade statistics indicate that the potential has not been fully realized. Despite the opening up of the Indian economy and the lowering of tariffs by Australia, India accounts for only a negligible proportion of Australia's trade. And growth of this trade has also been marginal. Among the several factors responsible for the low magnitude and slow growth of the bilateral trade, differences in the respective income tax systems could be a major one. Although several countries have been adopting policies aimed at progressively liberalizing trade and international investment, this process has stopped short of addressing the fundamental distortions which arise as a result of the inherent incompatibility of differing tax systems including the differing extent to which they rely on indirect or other forms of taxation, apart from direct taxes on business profits, as a means of raising revenue. This paper aims at a comparative analysis of income tax systems in the two countries with a view to highlight the aspects that are relevant for fostering the trade between the two countries. The paper also appraises the existing double taxation agreement between the two countries.