DOUBLE TAXATION RELIEF

• INTRODUCTION:

In the present era of globalization transfer of money takes place trough out the globe as people started adapting to this era of globalization there is a concern raised as to how to charge the tax for such income and in what country and hence double taxation avoidance agreement has been entered by various countries.

A DTAA is a tax treaty signed between two or more countries. Its key objective is that tax-payers in these countries can avoid being taxed twice for the same income. In other words Double Tax Avoidance Agreement (DTAA) is a tax treaty/agreement between two or multiple countries, to prevent double taxation of income earned in both countries.

• OBJECTIVES OF DTAA:

The  key objectives of DTAA are

To prevent tax evasion

To avoid double taxation

• DOUBLE TAXATION:

Double taxation means taxing the same income twice in the hands of an assessee. A particular income may be taxed in india in the hands of a person based on his /its residence. However the same income may be taxed in his /its hands in the source country also, as per the domestic laws of that country. This gives rise to double taxation .it is a universally accepted principle that the same income shouldn’t be subjected to tax twice. In order to take care of such situations, the income –tax act 1961 has provided for double taxation relief.

• ADVANTAGES OF DOUBLE TAXATION AVOIDANCE AGREEMENT:

There are various benefits associated with Double Tax Avoidance Agreement (DTAA). The basic benefit includes not paying double tax on income earned, apart from this, benefits such as:

1. Tax Exemption– Lets say country A (source country) imposes 10% tax on capital gains. Now if government of country A(source country) notifies that it shall not collect tax on investment coming from country B(origin country) and exempt country B from tax on capital gains on investment, this is known as tax exemption.
2. Lower Tax Rate– Lets take above example, when country A (source country) imposes 10% tax on capital gains, it notifies that it shall collect tax on capital gains at rate of 5% on investments coming from country B(origin country), this is known as tax reduction.
3. Refund- Lets say when company X from country A(origin country) invests in country B(source country) and pays 100$(hypothetical) as tax on income earned in country B(source country). Country A(origin country) may refund the 100$ or part of such tax to company X. This is known as refund in the concept of Double Tax Avoidance Agreement (DTAA)

• RELEIF UNDER DOUBLE TAXATION

Releif under Double taxation scheme is of two types they are

Unilateral Relief

Bilateral Relief

Bilateral Relief:

Under bilateral relief scheme both the countries that is resident country and foreign country enter into an agreement of mutually related terms and conditions to provide relief against double taxation and do justice to the assessee .Bilateral relief is provided u/s 90 and 90 A of the income tax act ,1961:

Under this there are two types:

Exemption Method:

Under this method income is taxed only in one country that is either in source country or in resident country but not in both

• Tax credit method:

Under this method, income is taxed in both the countries but relief is provided by the home country for the tax which is already paid in foreign country.

• MANNER OF Computing FOREIGN TAX CREDIT:

The credit of foreign tax would be the aggregate of the amounts of credit computed separately for each source of income arising from a particular country or specified territory outside India and shall be given effect to in the following manner:

a) The credit would be the lower of the tax payable under the income tax act, 1961 on such income and the foreign tax paid on such income.

However, where the foreign tax paid exceeds the tax payable in accordance with the provisions of the agreement for relief or avoidance of double taxation, such excess has to be ignored.

b) The credit would be determined by conversion of the currency of payment of foreign tax at the telegraphic transfer buying rate on the last day of the month immediately preceding the month in which such tax has been paid or deducted

There are situations we come across that many people being residents in India work in US and other foreign countries then income is subjected to tax in both the countries i.e., in source country like US and other foreign countries but being resident in India such income is also charged to tax in India . So, they can claim relief u/s 90 or 90 A of the income tax act , 1961.

• STEPS TO COMPUTE DOUBLE TAXATION RELIEF:

• (1)Compute Global income i.e., aggregate of Indian income and foreign income;
• (2) Compute tax on such global income as per the slab rates applicable;
• (3)Compute average rate of tax(i.e., Global income divided by amount of tax);
• (4)Compute an amount by multiplying foreign income with such average rate of tax;
• (5) Amount of relief shall be lower of 4 and 5

• DTAA WITH SPECIFIED ASSOCIATION:

When a specified association in India enters into an agreement with a specified association abroad, the central government may by notification adopt such agreement and provide relief under section 90A of the income tax act,1961.

The relief can be claimed only by the residents of the countries who have entered into the agreement, if resident of other countries want to claim the relief, then they have to obtain a Tax Residence Certificate (TRC) from the government of that country.

• UNILATERAL RELIEF:

The relief provided by home country irrespective of any agreement with the country concerned. This kind of relief exists because bilateral agreements might not be sufficient to meet all the cases. In India, Section 91 of the Income Tax Act, 1961 provides such relief. In other words, where Section 90 does not apply for relief under Section 91 will be available. Unilateral relief is only available in respect to doubly taxed income that is part of income which is included in assessee’s total income.

• STEPS TO COMPUTE RELIEF u/s 91of the income tax act,1961:

Step 1 – Calculate tax on total income inclusive of the foreign income on which relief is available. Claim any relief allowable under the provision of this act including rebates available under section 88E but before relief due under sections 90, 90A and 91.  

Step 2 – Add surcharge if applicable + education cess + SHEC after claiming the rebate.

Step 3– Calculate the average rate of tax by dividing the tax computed under Step 2 with the total income (inclusive of such foreign income). 

Step 4-Calculate the average rate of tax of the foreign country by dividing income tax actually paid in the said country after deducting all relief due. This should be done before deduction of any relief due in the said country in respect of double taxation by the whole amount of the income as assessed in the said country.

Step 5– Claim the relief from the tax payable in India at the rate calculated at Step 3 or Step 4, whichever is less.

• EXAMPLE:

Mr. Sai has doubly taxed foreign income of Rs . 1,00,000 /-. Tax is payable in India at the rate of 30%. Tax rate in foreign country is 20%.

The relief shall be calculated as follows:

Tax payable in India will be 30,000/- (1,00,000*30%)

Lower of Indian rate of tax(30%) and rate of tax in Foreign country(20%) is 20%.

The relief will be 20,000/- (1,00,000*20%)

The amount of relief will be Rs.20, 000/-

• CONCLUSION:

A treaty of double taxation provides against non-discrimination of foreign taxpayers as well as benefits the taxpayer of a country to know about his liabilities with a greater certainty. One of the recent highlights includes the bilateral agreement between India and Mauritius. Previously, only Mauritius had the right to tax on capital gains by companies investing in India. Tax on capital gains was nearly zero in Mauritius which made the country a sweet spot for individuals investing in Indian companies. After the amendment to the treaty, India gets the right to tax on capital gains from transfer of shares of Indian resident companies.