ARTICLE 2

Taxes Covered

This Article identifies the U.S. and Indian taxes to which the Convention applies. These are referred to in the Convention as '"United States tax" and "Indian tax'" respectively.

In the case of the United States, as indicated in paragraph 1(a), the covered taxes are the Federal income taxes imposed by the Code, together with the excise tax imposed on insurance premiums paid to foreign insurers (Code section 4371). With respect to the tax on insurance premiums, the Convention applies only to the extent that the risks covered by such premiums are not reinsured, directly or indirectly, with a person not entitled, under this or any other Convention, to exemption from the tax. The Article specifies that the Convention does not apply to the accumulated earnings tax (Code section 531), the personal holding company tax (Code section 541) or the social security taxes (Code sections 1401, 3101 and 3111). State and local taxes in the United States are not covered by the Convention.

Providing Convention coverage for the U.S. insurance excise tax effectively exempts Indian companies which insure U.S. risks from the tax. The tax is applicable under the Code only when an Indian company earns premiums which are not effectively connected with a trade or business in the United States. Under Article 7 (Business Profits), the United States cannot subject the business profits of an Indian enterprise to tax (i.e., to a covered tax) if the income of the enterprise is not attributable to a permanent establishment which the enterprise has in the United States or to sales of goods or performance of activities by the Indian company which is of the same kind as the goods sold or the activities carried out through the permanent establishment. If the Indian company sells insurance through a permanent establishment in the United States, and also sells insurance in the United States directly from India, unconnected to the permanent establishment, under the Code, the income from both parts of the business would be subject to net basis taxation, and the excise tax would not apply.

Paragraph 1(b) specifies the existing Indian taxes which are covered by the Convention. They are the income tax, including any surcharge on the income tax, and the surtax. The income tax on the undistributed income of companies, imposed under the Income Tax Act, is not a covered tax.

For purposes of Article 28 (Exchange of Information and Administrative Assistance), the Convention applies to a broader range of taxes than those enumerated in Article 2. For the United States, Article 28 applies to all taxes imposed under Title 26 of the United States Code (i.e., the Internal Revenue Code). For India, Article 28 applies to the income tax, the wealth tax and the gift tax.

Paragraph 1 specifies that the taxes referred to in subparagraphs (a) and (b) do not include fines, penalties and other amounts payable in respect of default or omission in relation to the covered taxes.

Under paragraph 2, the Convention will apply to any taxes which are identical or substantially similar, to those enumerated in paragraph 1, and which are imposed in addition to, or in place of, the existing taxes after September 12, 1989 (the date of signature of the

Convention). The paragraph also provides that the U.S. and Indian competent authorities will notify each other of significant changes in their taxation laws. This refers to changes which are of significance to the operation of the Convention. They will also notify each other of official published material concerning the application of the Convention, such as this technical explanation, Internal Revenue Service rulings and court decisions.