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Relief for Double Taxtation

Double Taxation Relief



Meaning
Generally, income is taxable on two basis viz. i) Source of income basis and ii) Residential Status Basis, which results into double taxation of same income of the person. Firstly, such income is taxed in the country in which such income is generated and again, the same income may be taxed on the basis of residential status of the person in another country. The phenomenal growth in international trade and commerce and increasing interaction among nations, citizens, residents and businesses of one country has extended their sphere of activity and business operations to other countries. In times when economies are going global and borders fading, double taxation is still one of the major obstacles to the development of inter-country economic relations. In order to prevent this hardship or to avoid double taxation , relief is provided to the tax-payer. Such relief is provided by two ways:

  • Bilateral Relief
  • Unilateral Relief

Bilateral Relief

To avoid double taxation and also with a view to ensure that national economic growth does not suffer, the Central government (u/s 90 of the Income Tax Act) has entered into Double Tax Avoidance Agreements with other countries (known as 'treaties' or 'DTAA') with following objectives:

  • Avoidance of double taxation
  • Mutual exchange of information for the prevention of evasion or avoidance of income-tax, or investigation of cases of such evasion or avoidance
  • Recovery of income-tax

Generally, such agreement provides relief through following methods:

Exemption Method: In this method, one country provides exemption to such type of income. Generally, residence country gave up its right and the country of source is then given exclusive right to tax such incomes.

Credit Method: In this method resident remains liable in the country of residence on its global income, however as far the quantum of tax liabilities is concerned credit or deduction for tax paid in the source country is given by the residence country against its domestic tax as if the foreign tax were paid to the country of residence itself.

 

Unilateral Relief

The aforesaid method is depending on bilateral activity of both the countries. However, no country will have such an agreement with every country in the world. In order to avoid double taxation in such cases, country of residence itself may provide relief on unilateral basis.


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In India , relief for avoidance of double taxation is provided in both ways. Provisions relating thereto are enumerated here-in-below:

 

Agreement with foreign countries [Sec. 90] [Bilateral Relief]

The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India:

  • for the granting of relief in respect of:

    ( i ) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or

    ( ii ) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or
  • for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or  

  • for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or  
     
  • for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be,  

and may make such provisions as may be necessary for implementing the agreement.

Notes

  • Where the Central Government has entered into an agreement with the Government of any country or specified territory outside India for granting relief of tax or avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.
  •  
  • Any term used but not defined in the Act or in the agreement shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.  
  •  
  • The charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company. 
  • Specified territory means any area outside India which may be notified as such by the Central Government.

For Double Taxation Avoidance Agreement with various countries, please click here

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Adoption by Central Government of agreements between specified associations for double taxation relief [Sec. 90A]

Any specified association in India may enter into an agreement with any specified association in the specified territory outside India and the Central Government may, by notification in the Official Gazette, make such provisions as may be necessary for adopting and implementing such agreement:

  • for granting of relief in respect of:
    1. income on which have been paid both income-tax under this Act and income-tax in any specified territory outside India ; or
    2. income-tax chargeable under this Act and under the corresponding law in force in that specified territory outside India to promote mutual economic relations, trade and investment, or
  • for the avoidance of double taxation of income under this Act and under the corresponding law in force in that specified territory outside India , or
  • for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that specified territory outside India, or investigation of cases of such evasion or avoidance, or
  • for recovery of income-tax under this Act and under the corresponding law in force in that specified territory outside India .

Notes

  • Specified association means any institution, association or body, whether incorporated or not, functioning under any law for the time being in force in India or the laws of the specified territory outside India and which may be notified as such by the Central Government for the purposes of this section;
  • Specified territory means any area outside India which may be notified as such by the Central Government for the purposes of this section.
  • Where a specified association in India has entered into an agreement with a specified association of any specified territory outside India and such agreement has been notified, for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. 

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Countries with which no agreement exists [Sec. 91] [Unilateral Relief]

If any person who is resident in India in any previous year proves that:

  • The income has accrued or arose during the previous year outside India ( and which is not deemed to accrue or arise in India ),
  • He has paid in any country income-tax on such income, by deduction or otherwise, under the law in force in that country
  • India does not have any agreement u/s 90 for the relief or avoidance of double taxation with that country

    - then he shall be entitled to the deduction from the Indian income-tax payable by him
  • of a sum calculated on such doubly taxed income at the average of Indian rate of tax or
  • of a sum calculated on such doubly taxed income at the average rate of tax of the said country,

    - whichever is the lower, or at the Indian rate of tax if both the rates are equal.
Notes

No benefit is available on income which is deemed to accrue or arise in India u/s 9 of the Indian Income tax Act, even though such income is doubly taxed.


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