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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.

Tax Evasion

Tax evasion, unlike tax avoidance, involves illegal actions to evade paying taxes owed. In India, tax evasion is a serious offense punishable under the Income Tax Act, 1961, and other relevant laws.

Provisions and Penalties related to tax evasion in the Indian Income Tax Act:

1. Underreporting of Income:

Tax evasion often involves underreporting of income or concealing sources of income to evade taxes. Section 270A of the Income Tax Act deals with underreporting of income and provides for penalties ranging from 50% to 200% of the tax payable on the underreported income.

2. Misrepresentation or False Statements:

Furnishing false statements, misrepresentation of facts, or providing fabricated documents to tax authorities constitutes tax evasion. Section 277 of the Income Tax Act deals with false statements and provides for imprisonment of up to two years along with fines.

3. Non-disclosure of Income:

Tax evasion can occur when individuals or businesses fail to disclose their income or assets to tax authorities. Section 276C of the Income Tax Act deals with cases of willful attempts to evade tax and provides for imprisonment of up to seven years along with fines.

4. Concealment of Income:

Intentionally concealing income, assets, or financial transactions to avoid paying taxes is considered tax evasion. Section 271 of the Income Tax Act deals with concealment of income and provides for penalties ranging from 100% to 300% of the tax sought to be evaded.

5. Benami Transactions:

Benami transactions, where property is held by one person but the consideration for it is provided by another, are prohibited under the Benami Transactions (Prohibition) Act, 1988. The Act provides for confiscation of benami properties and imprisonment of up to seven years.

6. Black Money:

Tax evasion involving undisclosed income and assets held abroad falls under the purview of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. The Act provides for stringent penalties and prosecution for concealing foreign income and assets.

7. Tax Evasion by Companies:

In cases where companies are involved in tax evasion, both the company and responsible officers can be held liable. Prosecution of companies for tax evasion is governed by the provisions of the Companies Act, 2013, and the Income Tax Act.

8. Prosecution and Penalties:

In addition to monetary penalties, tax evasion can lead to criminal prosecution, imprisonment, and seizure of assets. Tax authorities have the power to conduct raids, surveys, and investigations to uncover instances of tax evasion.

Legal Provisions against Tax Evasion:

Legal provisions against tax evasion are critical for maintaining the integrity of the tax system and ensuring that all taxpayers contribute their fair share. In India, the Income Tax Act, 1961, and other relevant laws contain various provisions to combat tax evasion.

1. Prosecution and Penalties:

The Income Tax Act provides for stringent penalties and criminal prosecution for tax evasion. Individuals or entities found guilty of tax evasion can face penalties ranging from fines to imprisonment, depending on the nature and severity of the offense.

2. Search and Seizure:

Tax authorities have the power to conduct searches and seizures to uncover instances of tax evasion. This includes raiding premises, seizing documents and assets, and gathering evidence of undisclosed income or assets.

3. Survey and Investigation:

Tax authorities can conduct surveys and investigations to gather information and evidence related to suspected tax evasion. These measures help in identifying undisclosed income, unreported assets, and other instances of non-compliance.

4. Whistleblower Provisions:

Income Tax Act encourages whistleblowers to report instances of tax evasion by providing rewards and protection to informants. Whistleblower provisions help in detecting tax evasion and promoting compliance with tax laws.

5. Information Exchange:

India has entered into agreements for the exchange of tax information with various countries to combat tax evasion and ensure transparency in cross-border transactions. These agreements facilitate the sharing of financial information to identify tax evasion by residents holding assets abroad.

6. Benami Transactions Prohibition Act:

Benami Transactions Prohibition Act, 1988, prohibits benami transactions where property is held by one person but the consideration is provided by another. The Act provides for confiscation of benami properties and penalties for violators.

7. Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act:

Black Money Act, 2015, targets undisclosed foreign income and assets held by Indian residents. It provides for stringent penalties and prosecution for concealing foreign income and assets.

8. General Anti-Avoidance Rule (GAAR):

GAAR is a provision introduced in the Income Tax Act to counter aggressive tax avoidance schemes that lack commercial substance. GAAR empowers tax authorities to disregard transactions or arrangements primarily aimed at tax evasion.

9. Specific Anti-Avoidance Rules (SAAR):

Income Tax Act contains specific provisions targeting certain types of transactions or arrangements prone to abuse. SAAR provisions, such as those related to transfer pricing, prevent profit shifting and tax evasion by multinational corporations.

Tax Avoidance

The Act provides various provisions that taxpayers can use to legitimately minimize their tax burden.

Methods of Tax Avoidance in the Indian Income Tax Act are:

1. Utilization of Tax Deductions:

Taxpayers can claim deductions under various sections of the Income Tax Act, such as Section 80C (for investments in specified instruments like provident fund, life insurance premiums, etc.), Section 80D (for health insurance premiums), and Section 80G (for donations to specified funds and charitable institutions). By making investments or contributions that qualify for deductions, taxpayers can reduce their taxable income.

2. Tax Exemptions:

Certain types of income are exempt from tax under specific provisions of the Income Tax Act. For example, agricultural income, income from long-term capital gains on listed securities, and income from certain investments in specified bonds are exempt from tax. Taxpayers may structure their affairs to generate income that falls within these exemptions.

3. Income Splitting:

Taxpayers may split their income among family members who fall into lower tax brackets. However, the Income Tax Act contains provisions to prevent abuse of this practice, such as the clubbing provisions under Section 64.

4. Tax Planning through Business Structures:

Business entities can use legal structures like forming partnerships, companies, or trusts to manage their tax liabilities efficiently. Each business structure has its own set of tax implications, and careful planning can help in optimizing tax outcomes.

5. Transfer Pricing:

In the case of multinational corporations, transfer pricing regulations come into play. These regulations aim to ensure that transactions between related entities are conducted at arm’s length prices. By appropriately setting transfer prices for goods and services, multinational corporations can allocate profits in a tax-efficient manner.

Legal Provisions against Tax Avoidance:

• General Anti-Avoidance Rule (GAAR):

GAAR is a provision introduced in the Income Tax Act to counter aggressive tax avoidance schemes. It empowers tax authorities to disregard transactions or arrangements that lack commercial substance or are deemed to be entered into primarily for the purpose of tax avoidance. GAAR allows tax authorities to re-characterize such transactions and assess tax liability accordingly.

• Specific Anti-Avoidance Rules (SAAR):

The Income Tax Act contains specific provisions targeting certain types of transactions or arrangements that are prone to abuse. For example, provisions related to transfer pricing aim to prevent profit shifting by multinational corporations through transactions with related parties. Similarly, the Act includes provisions to prevent abuse of tax incentives, such as those related to capital gains exemptions or deductions under various sections.

• Clubbing Provisions:

Income Tax Act includes provisions to prevent income splitting among family members to avoid tax. Under these clubbing provisions, certain types of income are “clubbed” or added to the income of the taxpayer who transferred the income to another family member. This prevents taxpayers from artificially reducing their tax liability by diverting income to family members who fall into lower tax brackets.

• General Anti–Avoidance Rules in International Taxation:

India has also entered into Double Taxation Avoidance Agreements (DTAA) with various countries to prevent tax evasion and avoidance. These agreements contain general anti-avoidance rules that empower tax authorities to combat abusive tax practices in cross-border transactions.

• Judicial Precedents:

Indian courts have consistently upheld the principle that transactions must have commercial substance and bona fide purpose beyond tax avoidance to be considered valid. Courts have the authority to disregard transactions that are found to be sham or lacking in commercial substance.

Key differences between Tax Evasion and Tax Avoidance

Aspect	Tax Evasion	Tax Avoidance
Legality	illegal	Legal within Limit
Intent	Intentional deception	Strategic planning
Compliance	Violates law	Adheres to law
Punishment	Fines, imprisonment	Penalties, fines
Disclosure	Conceals income/assets	Discloses income/assets
Transparency	Lack of transparency	Transparent transactions
Intent to Deceive	Deceptive practices	Legal loopholes exploited
Detection	Detected through investigation	May be detected or undiscovered
Ethics	Unethical	Ethical
Impact on System	Undermines tax system	Within legal framework
Consequences	Legal penalties, stigma	Financial consequences
Intent to Comply	Intends to evade tax obligations	Complies with tax laws

A tax haven is a country that offers foreign businesses and individuals minimal or no tax liability for their bank deposits in a politically and economically stable environment. They have tax advantages for corporations and for the very wealthy, and obvious potential for misuse in illegal tax avoidance schemes.

Companies and wealthy individuals may use tax havens legally as a means of stashing money earned abroad while avoiding higher taxes in the U.S. and other nations.

Tax havens may also be used illegally to hide money from tax authorities at home. The tax haven can make this work by being uncooperative with foreign tax authorities. In recent times, tax havens are under increasing international political pressure to cooperate with foreign tax fraud inquiries.

Different types of Tax Havens:

• Pure Havens: Income or Capital gains are not charged at all (example; Bermuda, Cayman Islands, Vanuatu etc.)
• Tax Havens where the state-approved rate of taxation is low due to the implementation of tax agreements between different countries regarding double taxation (example; Liechtenstein, Switzerland, Republic of Ireland etc.)
• Tax Havens where tax payers are exempted from paying taxes for cross-border transactions (example; Costa Rica, The Philippines, Panama etc.)
• Tax Havens that engage in a preferential treatment towards offshore and holding companies (example; Austria, Luxembourg, Thailand etc.)
• Tax Havens that offer exemptions for industries that have been made for the development of exports (example; Ireland, Madeira in Portugal etc.)
• Tax Havens that provide financial benefits and privileges to companies classified as ‘Offshore Companies’ (example; Bahamas, Antigua & Barbuda, British Virgin Islands etc.)
• Tax Havens that provide specific benefits to banking companies or financial companies which engage in offshore activities (example; Anguilla, Grenada, Jamaica etc.)

Reduction of Tax liability by the usage of Tax Havens also interferes with the Indian government’s efforts to implement its economic policies. Though the economic policies have been structured by the government for the benefit of the people, Tax Havens have served as a significant barrier towards the proper execution/implementation of the former. This, too, occurs due to a shortage of funds in the hands of the government.

Tax evasion by the usage of Tax Havens to store “Black Money” also dismantles the equity attribute of any tax system. In India, specifically, reduction of their tax liability by many leads to an increase in the rates of taxes as charged by the government for every assessment year (for the purpose of increasing its revenue) and the burden of that unfortunately ends up falling upon the honest tax payers. As a consequence of this, even the tax payers who always pay their taxes honestly end up engaging in practices such as tax evasion in order to reduce an already incremental burden.

Though the policies of the government aim at the redistribution of wealth and a decrease in the income/financial margin between the various economic classes of people within the country, Tax Havens have majorly constricted such efforts. Redistribution of Wealth is considered one of the most important pillars on which the Law of Taxation was developed. Today, the redistribution of wealth and reduction of income disparity is a very essential need for a country like India, where the gap between the wealthy and the poor is increasing significantly on a daily basis. Under such circumstances, the need for the proper implementation of government policies aimed at such are required in utmost urgency. However, Tax Havens and its usage to reduce tax liability restricts such policies and in fact, manages to increase the income disparity present in India. It leads to the concentration of economic power in the hands of a few, which is a threat to the economy itself. As a result of this, the rich in India become richer day by day whereas the poor in India get poorer day by day.

Tax Avoidance

Tax avoidance schemes may take advantage of low or no-income tax countries known as tax havens. Corporations may choose to move their headquarters to a country with more favorable tax environments. In countries where movement has been restricted by legislation, it might be necessary to reincorporate into a low-tax company through reversing a merger with a foreign corporation (“inversion” similar to a reverse merger). In addition, transfer pricing may allow for “earnings stripping” as profits are attributed to subsidiaries in low-tax countries.

For individuals tax avoidance has become a major issue for governments worldwide since the 2008 recession. These tax directives began when the United States introduced the Foreign Account Tax Compliance Act (FATCA) in 2010, and were greatly expanded by the work of The Organisation for Economic Co-operation and Development (OECD). The OECD introduced a new international system for the automatic exchange of tax information known as the Common Reporting Standard (CRS) to which around 100 countries have committed. For some taxpayers, the CRS is already “live”; for others it is imminent. The goal of this worldwide exchange of tax information is tax transparency, and has aroused concerns about privacy and data breaches due to the sheer volume of information that is going to be exchanged.

Expanded Worldwide Planning (EWP) is an element of international taxation created in the wake of tax directives from government tax authorities after the worldwide recession beginning in 2008. At the heart of EWP is a properly constructed Private placement life insurance (PPLI) policy that allows taxpayers to use the regulatory framework of life insurance to structure their assets. These assets can be located anywhere in the world and at the same time can be brought into compliance with tax authorities worldwide. EWP also brings asset protection and privacy benefits that are set forward in the six principals of EWP.

Regulatory Mechanisms Adopted by The Government of India

In order to limit the practices of Base Erosion and Profit Shifting, the Organisation for Economic Co-operation and Development (OECD) introduced a set of action plans. These plans, collectively named as the BEPS Action Plan, were discussed and subsequently approved by all members of the G20. The BEPS Action Plan consists of 15 different action plans, each for a different issue relating to Base Erosion and Profit Shifting. India, like many other countries, have adopted these action plans in order to resolve complications arising out of the various number of issues discussed above. Provided below is the list of 15 action plans and what objective each plan is sought to achieve:

• ACTION 1 (DIGITAL ECONOMY): The primary aim of the Action 1 is to identify and address the main challenges that the digitalization of the economy poses for the existing tax laws and rules.
• ACTION 2 (HYBRIDS): The primary aim of the Action 2 is to countervail the effects of hybrid mismatch arrangements by making changes to the model tax convention and providing recommendations with regards to making changes to the various existing domestic taxation laws and rules.
• ACTION 3 (CONTROLLED FOREIGN COMPANIES): The primary aim of the Action 3 is to provide recommendations with regards to the strengthening of international as well as domestic laws/rules pertaining to Controlled Foreign Companies (CFCs). It also aims at identifying and addressing various issues relating to tax avoidance by resident corporations through a non-resident affiliate.
• ACTION 4 (INTEREST DEDUCTIONS): The primary aim of the Action 4 is to limit the base erosion practice of corporations by deducting the rate of interest as well as by introducing other financial payments. This Action Plan had been introduced by the OECD primarily in order to address issues relating to the various domestic tax laws of different countries.
• ACTION 5 (HARMFUL TAX PRACTICES): The primary aim of the Action 5 is to identify and defy various harmful tax practices. Through this Action Plan, the OECD attempted to extend its recommendations regarding the restructuring of laws to non-OECD members as well.
• ACTION 6 (PREVENTION OF TREATY ABUSE): The primary aim of the Action 6 is to prevent treaty abuse by providing recommendations to countries with regards to restructuring its domestic laws/rules in such a manner so as to prevent the granting of treaty benefits to parties in unbecoming circumstances.
• ACTION 7 (PERMANENT ESTABLISHMENT): Action 7 aims at the restructuring/redefining of the threshold to prove Permanent Establishment (“PE”) in order to put a hurdle on the practices of Base Erosion and Profit Shifting.
• ACTION 8, 9 & 10 (TRANSFER PRICING): Transfer Pricing, in simply words, can be defined as an accounting practice whereby the price that one division of a corporation charges another for its goods and services are represented. This, in turn, aids in the determination of the price of goods/services exchanged between subsidiaries, affiliates and CFCs (all which are part of the same holding company). Transfer Pricing is a very common method of tax base reduction and is commonly used by many companies. The primary and common aim of the Action Plans 8, 9 and 10 is to ensure that the transfer pricing outcomes (as represented) are proportional with the value creation of the goods/services. The same can only be done the ensuring that the value for tax is accordant to the economic activity that generates that value. The Action Plans 8, 9 and 10 are aimed at addressing issues/concerns relating to intangible assets, risks & capitals and high risk transactions respectively.
• ACTION 11 (DATA COLLECTION): The primary aim of the Action 11 is to ensure the proper collection and analysis of data relating to Base Erosion and Profit Shifting for the purpose of redressal.
• ACTION 12 (DISCLOSURES RELATING TO AGGRESSIVE TAX PLANNING): Action 12 aims at the development of mandatory disclosure rules by parties if they are engaging in aggressive tax planning (includes aggressive/abusive transactions, structures or arrangements). The same has been done in order to reduce the administrative costs relating to tax administration by the authorities.
• ACTION 13 (DOCUMENTATION OF TRANSFER PRICING): The primary aim of the Action 13 is to re-analyse and restructure the process relating to the documentation of transfer pricing arrangements in order to install a greater transparency to it.
• ACTION 14 (DISPUTE RESOLUTION): The Action 14 aims in making the existing dispute resolution mechanisms and procedures more effective and systematic in nature. Through the introduction of Action 14, the OECD has clearly shown demur upon the practice of countries to engage in mutual agreement procedures (MAPs) to resolve treaty-related disputes.
• ACTION 15 (MULTILATERAL INSTRUMENTS): Last but not the least, the Action 15 focuses on the amendment of bilateral treaty agreements in order to resolve issues arising out of Base Erosion and Profit Shifting.

Under the Income Tax Act, 1961, agriculture income is defined and treated uniquely compared to other forms of income. This special treatment is rooted in the importance of agriculture to the Indian economy and the large population dependent on it for their livelihood.

Definition of Agricultural Income:

Section 2(1A) of the Income Tax Act, 1961 defines agricultural income as:

1. Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.
2. Any income derived from such land by agricultural operations including processing of the agricultural produce, raised or received as rent-in-kind so as to render it fit for the market, or sale of such produce.
3. Income derived from buildings on or identified with agricultural land. The crucial requirement here is that the building should be occupied by the cultivator or the receiver of rent or revenue of the land.

The interpretation of what constitutes “agricultural operations” includes all activities starting from basic operations like plowing and sowing to subsequent processes such as weeding, digging the soil around the growth, removal of undesirable undergrowths, and all operations which foster the growth and preservation of the same produce.

Tax Exemption of Agricultural Income

Agricultural income is exempt from income tax under Section 10(1) of the Income Tax Act, 1961. This exemption is pivotal in supporting the agricultural sector by alleviating the tax burden on farmers. However, the calculation of tax on non-agricultural income of individuals receiving agricultural income is influenced by the agricultural income in a manner that effectively raises the tax rate on non-agricultural income.

Integration of Agricultural and Non-Agricultural Income for Tax Calculation

Although agricultural income is exempt from tax, it plays a role in determining the tax rate applicable to non-agricultural income if the total income, including agricultural income, exceeds the basic exemption limit. This is done through a method called “partial integration” under Sections 2(1A) and 10(1). The steps are as follows:

1. Calculate the total income excluding agricultural income.
2. Add the basic exemption limit to the agricultural income.
3. Add the above result to the non-agricultural income.
4. Calculate tax on the total amount from step 3.
5. Subtract the tax calculated on the sum of the basic exemption limit and agricultural income from the tax computed in step 4.

The outcome ensures that a taxpayer with agricultural income does not pay more tax on non-agricultural income than a taxpayer with a similar amount of non-agricultural income but without any agricultural income.

Special Provisions and Considerations:

1. Lease Land for Agriculture:

Income derived from land given on lease for agricultural purposes can also be considered agricultural income if the land is being used directly for agricultural operations.

2. Composite Rent:

Where the rent received is partly agricultural and partly non-agricultural, the income needs to be appropriately apportioned.

3. Income from Farm Buildings:

Necessary farm buildings that are on or near the agricultural land and are used as dwellings for those employed on the land or for storing produce also qualify under agricultural income.

Judicial Interpretations and Rulings

Various rulings and judicial interpretations have clarified aspects of what constitutes agricultural income. For instance, income from dairy farming, poultry farming, stock breeding, or sale of spontaneously grown trees is not considered agricultural income. However, income from operations such as breeding and rearing of livestock, which are essentially agricultural operations, is considered agricultural.

Challenges and Criticisms

While the exemption of agricultural income under the Income Tax Act is aimed at supporting farmers, it is often criticized for enabling tax evasion, especially when high-income earners exploit this provision to shield their income from taxes by reclassifying it as agricultural. This has led to calls for more stringent definitions and perhaps limits on what can be exempted under this head.

Section 5 of the Indian Income Tax Act, 1961, plays a pivotal role in delineating the scope of total income, which serves as the basis for levying income tax on individuals, Hindu Undivided Families (HUFs), companies, firms, Association of Persons (AOPs), Body of Individuals (BOIs), and other artificial juridical persons. This section lays down the principles governing the taxation of income earned or deemed to be earned in India during a specific previous year. In essence, it establishes the territorial and residence-based framework for determining the tax liability of assessees.

Section 5 of Income Tax Act, 1961 provides Scope of total Income in case of of person who is a resident, in the case of a person not ordinarily resident in India and person who is a non-resident which includes. Income can be Income from any source which (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year.

• Territorial Scope:

Section 5(a) of the Income Tax Act elucidates that the total income of any previous year of an assessee includes all income accruing or arising, whether directly or indirectly, through or from any business connection in India or from any property in India or through or from any asset or source of income in India or through the transfer of a capital asset situated in India. This provision embodies the principle of territorial taxation, whereby income derived from sources within the geographical boundaries of India is subject to taxation. It encompasses various scenarios, such as income earned by a non-resident through a business connection in India, rental income from property situated in India, income generated from assets or sources located in India, and capital gains arising from the transfer of assets situated in India.

• Residential Scope:

In addition to income earned or accruing in India, Section 5(b) extends the scope of total income to include income received or deemed to be received in India during the previous year. This provision captures income received within India’s jurisdiction, regardless of its source. It applies not only to residents but also to non-residents who receive income in India. Moreover, the concept of deemed receipt broadens the scope of total income by including certain incomes that are not actually received but are deemed to have been received under the provisions of the Income Tax Act. For instance, interest credited to a non-resident’s account in India is deemed to be received in India, even if it’s not withdrawn.

• Accrual or Arising in India:

Section 5(c) further expands the ambit of total income by incorporating income accruing or arising, whether directly or indirectly, in India during the previous year. This provision encompasses income that may not have been received but has accrued or arisen to the taxpayer in India. It applies to residents as well as non-residents, ensuring that income arising within India’s territorial jurisdiction is subject to taxation. Various types of income, such as salaries for services rendered in India, dividends declared by Indian companies, and interest income from Indian sources, fall within the purview of this provision.

• Deemed Accrual or Arising in India:

Additionally, Section 5(d) of the Income Tax Act introduces the concept of deemed accrual or arising of income in India, thereby further broadening the scope of total income. This provision deems certain incomes to accrue or arise in India, notwithstanding their actual place of accrual or arising. For instance, royalties, fees for technical services, and certain other incomes derived by non-residents are deemed to accrue or arise in India if they are payable by a person who is a resident in India or by a person who carries on business or profession in India. This deeming provision prevents the erosion of the tax base by ensuring that income generated from Indian assets or activities is subject to taxation in India, even if the recipient is a non-resident.

• Taxation of Global Income:

One of the fundamental principles of taxation is that residents are liable to pay tax on their global income, i.e., income earned both within and outside India’s territorial jurisdiction. Section 5(e) of the Income Tax Act enshrines this principle by including the total income of a resident taxpayer, irrespective of its source. This provision ensures that residents are taxed on their worldwide income, thereby preventing tax evasion through the shifting of income to jurisdictions with lower or no tax rates. However, certain relief provisions, such as double taxation relief under Section 90 or Section 91, mitigate the burden of taxation on income earned in foreign jurisdictions.

• Exceptions and Exemptions:

While Section 5 delineates the broad contours of total income, certain exceptions and exemptions carve out specific categories of income that are either wholly or partially excluded from the purview of taxation. Various provisions under the Income Tax Act provide exemptions for certain types of income, such as agricultural income, income of charitable institutions, dividends from domestic companies, long-term capital gains on specified assets, etc. These exemptions serve policy objectives, such as promoting agricultural development, encouraging charitable activities, fostering investment, and stimulating economic growth.

• Business Connection:

Section 5(a) refers to income accruing or arising directly or indirectly from any business connection in India. Understanding the concept of “Business connection” is crucial as it determines the taxability of income earned by non-residents. A business connection exists when a non-resident has a significant presence in India, such as a branch, office, factory, or agent acting on behalf of the non-resident. Income attributable to such business connection, whether directly earned in India or indirectly connected to Indian operations, is subject to taxation.

• Property in India:

The reference to income arising from property in India under Section 5(a) encompasses various types of income, including rental income, lease income, capital gains from the sale of immovable property, and other income derived from property situated in India. This provision ensures that income generated from Indian real estate assets, whether owned by residents or non-residents, is subject to taxation in India.

• Source of Income in India:

Section 5(a) also covers income derived from any asset or source of income in India. This broad provision encompasses diverse sources of income, including interest income from Indian bank accounts, dividends from Indian companies, royalties from Indian sources, fees for technical services provided in India, and other income streams connected to Indian assets or activities. It ensures that income generated from Indian sources, regardless of the recipient’s residency status, is subject to taxation.

• Transfer of Capital Assets:

The inclusion of income arising from the transfer of a capital asset situated in India under Section 5(a) implies that capital gains arising from the sale or transfer of immovable property, securities, or other assets located in India are subject to taxation. Capital gains tax is levied on the profit earned from the transfer of capital assets, with specific provisions for computing gains, determining the holding period for classification as short-term or long-term, and allowing deductions or exemptions under certain conditions.

• Treaty Provisions:

Section 5(f) of the Income Tax Act empowers the Central Government to enter into agreements with foreign countries or specified territories for the avoidance of double taxation and prevention of fiscal evasion. These bilateral or multilateral treaties, commonly known as Double Taxation Avoidance Agreements (DTAA), override the provisions of the Income Tax Act to the extent they are more beneficial to the taxpayer. They provide relief from double taxation by allocating taxing rights between jurisdictions, providing for lower withholding tax rates, and allowing taxpayers to claim tax credits or exemptions.

• Anti-avoidance Provisions:

To prevent tax evasion and abuse of tax laws, the Income Tax Act incorporates anti-avoidance provisions, such as General Anti-Avoidance Rules (GAAR), Specific Anti-Avoidance Rules (SAAR), and Transfer Pricing Regulations. These provisions empower tax authorities to disregard transactions or arrangements that are primarily undertaken for tax avoidance purposes and recharacterize them to reflect their substance. By curbing aggressive tax planning strategies and enforcing the principle of substance over form, these provisions ensure the integrity and effectiveness of the tax system.

Table explaining Scope of total Income under section 5 of Income Tax Act, 1961

Sr. No	Particulars	Resident Ordinary Resident (ROR)	Resident Not Ordinary Resident (RNOR) – 5(1)	Non Resident (NR)– 5(2)
1	Income received in India	Taxed	Taxed	Taxed
2	Income Deemed to be receive in India	Taxed	Taxed	Taxed
3	Income accrues or arises in India	Taxed	Taxed	Taxed
4	Income deemed to accrues or arises in India	Taxed	Taxed	Taxed
5	Income accrues or arises outside India	Taxed	NO	NO
6	Income accrues or arises outside India from business/profession controlled/set up in India	Taxed	Taxed	NO
7	Income Other than Above (No Relation In India)	Taxed	NO	NO

Note:

1. Residential status is as per section 6 of Income Tax Act, 1961.
2. Deemed income is not actually accrued but is supposed to be accrued notionally.
3. The income accrued is when the assessee obtains the rights to receive it.
4. Previous year means the financial year immediately preceding the assessment year.

Understanding the concepts of Gross Total Income (GTI) and Total Income is essential for effective financial management and tax compliance. These terms are often used in the context of individual and corporate taxation, reflecting the different stages of income calculation before applying taxes.

Gross Total Income (GTI)

Gross Total Income refers to the aggregate of all incomes earned by an individual or entity before any deductions under the Income Tax Act are applied. It encompasses all sources of income as recognized by tax laws.

Components of Gross Total Income: GTI is broadly categorized into five heads of income:

1. Income from Salaries:

• Basic Salary: Fixed monthly pay excluding allowances and benefits.
• Allowances: Housing rent allowance, dearness allowance, etc.
• Perquisites: Benefits like a company car, rent-free accommodation, etc.
• Bonus and Commissions.

2. Income from House Property:

• Rental Income: Income from renting residential or commercial property.
• Self-Occupied Property: Notional rent for tax purposes.

3. Profits and Gains from Business or Profession:

• Business Income: Earnings from business activities.
• Professional Income: Income from professional services like consultancy, legal services, etc.

4. Capital Gains:

• Short-Term Capital Gains:

Gains from the sale of assets held for a short period.

• Long-Term Capital Gains:

Gains from the sale of assets held for a longer period.

5. Income from Other Sources:

• Interest Income:

Earnings from bank deposits, bonds, etc.

• Dividends:

Earnings from shareholdings.

• Gifts and Lottery Winnings:

Non-recurring income sources.

Computation of Gross Total Income:

GTI is computed by summing up the income under each of the above heads. The formula can be represented as:

GTI = Income from Salaries + Income from House Property + Profits and Gains from Business or Profession + Capital Gains + Income from Other Sources

Example Calculation: Consider an individual with the following income components:

• Salary: Rs.50,000
• House Property Income: Rs.10,000
• Business Income: Rs.20,000
• Short-Term Capital Gains: Rs.5,000
• Interest Income: Rs.2,000

GTI would be:

GTI = 50,000 + 10,000 + 20,000 + 5,000 + 2,000 = Rs.87,000

Total Income

Total Income is derived from Gross Total Income after allowing for deductions under Chapter VI-A of the Income Tax Act. It is the income on which tax is calculated.

Deductions under Chapter VI-A:

Various sections under Chapter VI-A provide for deductions from GTI. Some common deductions include:

1. Section 80C:

• Investments: Life insurance premiums, Public Provident Fund (PPF), National Savings Certificates (NSC), etc.
• Maximum Deduction: Up to Rs. 150,000.

2. Section 80D:

• Medical Insurance Premiums: Premiums paid for health insurance for self, spouse, children, and parents.
• Maximum Deduction: Up to Rs. 25,000 (additional Rs. 25,000 for senior citizens).

3. Section 80E:

• Education Loan Interest:

Interest paid on loans for higher education.

• No upper limit on deduction.

4. Section 80G:

• Donations:

Donations to specified funds and charitable institutions.

• Deduction varies based on the type of donation.

5. Section 80TTA:

• Savings Account Interest:

Interest earned on savings accounts.

• Maximum Deduction:

Up to Rs.10,000.

Computation of Total Income:

Total Income is calculated by subtracting the allowable deductions from the GTI. The formula can be represented as:

Total Income = Gross Total Income − Deductions under Chapter VI-A

Example Calculation:

Using the GTI from the previous example (Rs.87,000), assume the individual has the following deductions:

• Section 80C: Rs.10,000
• Section 80D: Rs.5,000
• Section 80E: Rs.3,000

Total Deductions = Rs.10,000 + Rs.5,000 + Rs.3,000 = Rs.18,000

Total Income would be:

Total Income = 87,000−18,000=Rs.69,000

Importance of GTI and Total Income

1. Tax Calculation:

• Gross Total Income:

Helps in understanding the overall earnings from different sources before any tax-saving measures are considered.

• Total Income:

This the basis for determining the tax liability after accounting for eligible deductions.

2. Financial Planning:

Knowing the GTI helps in identifying potential areas for tax saving. Helps in planning investments and expenditures to optimize tax liabilities.

3. Compliance:

Accurate calculation of GTI and Total Income is crucial for filing tax returns. Ensures adherence to tax laws and avoids legal consequences.

Challenges in Calculating GTI and Total Income

• Accurate Reporting:

Ensuring all sources of income are reported accurately can be challenging, especially for individuals with multiple income streams.

• Understanding Deductions:

Not all taxpayers are fully aware of the deductions available under Chapter VI-A, which may lead to higher tax liabilities than necessary.

• Documentation:

Maintaining and presenting the necessary documentation for deductions can be cumbersome.

• Changing Tax Laws:

Keeping up with changes in tax laws and regulations requires continuous learning and adaptation.

Practical Tips

• Maintain Records:

Keep detailed records of all sources of income and related documents for deductions.

• Consult Tax Professionals:

Seek professional advice to ensure all eligible deductions are claimed and to stay updated with the latest tax laws.

• Use Tax Software:

Utilize tax software for accurate calculation and filing of tax returns.

• Review Regularly:

Regularly review income and expenditure to optimize tax planning strategies throughout the year.