Double taxation relief

Double taxation refers to the phenomenon of taxing the same income twice. Double taxation of the same income occurs when the same income related to an individual is treated as being accrued, arising or received in more than one country. The article studies double taxation relief according to Section 90 of the Income Tax Act.

Double Taxation Avoidance

To mitigate the double taxation of income the provisions of double taxation relief have been created. The double taxation relief is accessible in two ways, one is the unilateral relief and the other is the bilateral relief. The Government of India has signed Double Tax Avoidance Agreement, a bilateral treaty with over 150 countries to provide double taxation relief to Indian citizens and residents.

Section 90 of the Income Tax Act

Section 90 of the Income Tax Act is associated with relief measures for assesses involved in paying taxes twice i.e. paying taxes in India as well as in Foreign Countries or territory outside India. Section 90 also contains provisions which will certainly enable the Central Government to enter into an agreement with the Government of any country outside India or a definite territory outside India. Section 90 is intended for granting relief with reference to any of the following relevant situations that may occur:

• Income on which tax has been paid both under Income Tax Act, 1961 and Income Tax prevailing in that country or definite territory.
• Income tax chargeable under Income Tax Act, 1961 and according to the corresponding law in force in that country or specified territory to boost mutual economic relations, trade and investment.
• For the prevention of double taxation of income under Income Tax Act, 1961 and under the equivalent law in force in that country or specified territory.
• For exchange of information regarding the avoidance of evasion or avoidance of income-tax chargeable as per Income Tax Act, 1962 or under the equivalent law in force in that country or specified territory, or investigation of cases of evasion or avoidance.
• For recovery of income tax under the Income Tax legislation which is in force in India and under the equivalent law in force in that country of the specified territory.

The double tax relief as per Section 90 can be claimed only by the residents of the countries who have entered into the agreement. If a resident of other countries wants to claim relief related to the phenomenon of double taxation, then they have to obtain a Tax Residence Certificate (TRC) from the government of a particular country.

Double Taxation Relief

Relief from double taxation can be provided under two ways namely exemption method and tax credit method.  Under the exemption method, specific income is taxed in one of the two countries and exempted in another country. Under the tax credit method, the income is taxed jointly with the countries mentioned in the income tax treaty, in addition to the country of residence. This will authorize the tax credit or deduction for the tax charged in the country of residence.

Power to Choose

Given a scenario where Bilateral Agreement has been entered into with reference to Section 90 with a foreign country, then the assessee has an opportunity either to be taxed according to the Double Taxation Avoidance Agreement or according to the normal provisions of Income Tax Act 1961, whichever is more favourable to the concerned assessee.