Double taxation is a situation where an income is subject to tax twice. This can occur in one of two ways – economic or juridical. Economic double taxation occurs if an income or a part of it is taxed twice in the same country, in the hands of two individuals. Alternatively, juridical double taxation occurs if income earned outside India is taxed two times in the hands of the same individual, once abroad and once in their home country. This unique situation puts an undue burden on the taxpayer when their income is taxed twice.
DTAAs can be either be comprehensive, encapsulating all income sources, or limited to certain areas, which means taxing of income from shipping, inheritance, air transport, etc. India presently has DTAA with 80+ countries, with plans to sign such treaties with more countries in the years to come. Some of the countries with which it has comprehensive agreements include Australia, Canada, the United Arab Emirates, Germany, Mauritius, Singapore, the United Kingdom and the United States of America.
How can double taxation be avoided?
While there is little that the individual taxpayer can do to avoid double taxation, the Income Tax act itself offers certain provisions to give relief to an individual whose income is likely to be taxed twice. The foundation of this relief measure lies in a Double Taxation Avoidance Agreement (DTAA).
What is a DTAA?
A Double Taxation Avoidance Agreement is a tax treaty that India signs with another country. An individual can avoid being taxed twice by utilizing the provisions of this treaty. DTAAs can either be comprehensive agreements, which cover all types of income, or specific treaties, targeting only certain types of income.
For instance, there is a DTAA between India and Singapore under which income is taxed based on the residential status of the individual. This streamlines the flow of taxation and ensures that the individual is not taxed twice for the income earned outside India. Currently, India has DTAAs in place with more than 80 countries.
How is relief against double taxation provided under the Income Tax Act?
Relief against double taxation can be unilateral or bilateral.
- Unilateral relief: Section 91 of the Income Tax Act, 1961 provides for unilateral relief against double taxation. According to the provisions of this section, an individual can be relieved of being taxed twice by the government, irrespective of whether there is a DTAA between India and the foreign country in question or not. However, there are certain conditions that have to be satisfied in order for an individual to be eligible for unilateral relief. These conditions are:
- The individual or corporation should have been a resident of India in the previous year.
- The income should have been accrued to the taxpayer and received by them outside India in the previous year.
- The income should have been taxed both in India and in the country with which there is no DTAA.
- The individual or corporation should have paid tax in that foreign country.
- Bilateral relief:Bilateral relief is covered under section 90 of the Income Tax Act, 1961. It offers protection from double taxation through a DTAA. This type of relief is offered in two different ways.
- Exemption method: The exemption method offers full and complete protection from being taxed twice. That is, if an income earned outside India has been taxed in the relevant foreign country, it is not subject to tax in India.
- Tax Credit method: According to this method, the individual or the corporation can claim a tax credit (deduction) for the taxes paid outside India. This tax credit can be utilized to set-off the tax payable in India, thereby reducing the assessee’s overall tax liability.
Thus, by utilizing the provisions of DTAAs and the relief measures offered under the Income Tax Act, individuals earning income from other countries can minimize their tax liabilities and avoid the burden of double taxation.