The problem occurs when a person or company has to pay taxes twice on the same income earned in two different countries.

For example, an Indian professional works and earns in USA for 3 months and returns to India and on his income earned in USA, both India and USA levy tax. It is double taxation and it looks unfair and illogical. 

It also demotivates the people and companies from working in multiple countries and also demotivates the investment climate. This problem is known as double taxation and it’s solution is Double Taxation Avoidance Agreements (DTAAs).

Let's understand how DTAA works with the help of an example. Let's say you are a resident of India who has invested in a company located in the United States (US stocks).

When you receive dividend or any income from these investments, both USA and India would claim their share of the taxes. But if India and US have a DTAA agreement, you will not have to pay double taxes. This income earned by you from the US will be taxed in either India or the US, depending on the terms of the agreement.

The Double Tax Avoidance Agreement (DTAA) is a tax treaty signed between two or more countries to help tax avoid paying taxes twice on the same income.

This agreement can either be comprehensive, which covers all income sources, or may be limited to certain areas. Incomes from services, salary, property, capital gains, and savings deposits, fixed deposit and other sources are covered under the DTAA.

The intent behind this agreement is to make a country appear as an attractive investment destination by providing relief on dual taxation.

India has Double Taxation Avoidance Agreements with more than 90 countries, such as China, Bangladesh, Mauritius and others. DTAA provisions are added to the Income tax Act 1961.