Concept of Double Taxation Relief u/s 90/90A/91

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January 4, 2013Income Tax8 Comments

Brief Note on Double Taxation Relief under Section 90, 90A and 91

The Meaning & the Concept:

  • The situation of double taxation will arise where the income gets taxed in two or more countries where due to residency or source principle as the case may be.
  • The problem of double taxation arises if the income of a person is taxed in one country on the basis of residency and on the basis of residency in another country or on the basis of both.
  • To mitigate the double taxation of income the provisions of double taxation relief were made. The double taxation relief is available in two ways one is unilateral relief and other is bilateral relief.
  • Government of India can enter into agreement with a foreign government vide Entry 14 of the Union List regarding any matter provided Parliament verifies it.
  • Double Tax Avoidance Agreement is a king of bilateral treaty or agreement, between Government of Indian and any other foreign country or specified territory outside India.
  • Such treaty or agreement is permissible in terms of Article 253 of the Constitution of India.

Section 90: Agreement with Foreign Countries or specified territories

  • India has entered into bilateral agreements with many countries regarding avoidance of double taxation including tax avoidance and tax evasion issue.
  • Section 90 of the Income Tax deals with relief granted to assesses involved in paying taxed twice that is, paying taxes in India as well as in Foreign Countries or specified territory outside India.
  • As per Section 90, the Central Government may enter into an agreement with the Government of any country outside Indian or specified territory outside India.
    1. for granting relief in respect of
      • income on which tax have been paid both under Income Tax Act, 1961 and Income Tax prevailed in that country or specified territory or
      • income tax chargeable under Income Tax Act, 1961 and under the corresponding law in force in that country or specified territory to promote mutual economic relations, trade and investment,or
    2. for that avoidance of double taxation of income under Income Tax Act, 1961 and under the corresponding law in force in that country or specified territory.
    3. for exchange of information for the prevention of evasion or avoidance of income tax chargeable under the Income Tax Act, 1962 or under the corresponding law in force in that country of specified territory, or investigation of cases of such evasion or avoidance, or
    4. for recovery of income tax under Income Tax Act, 1961 and under the corresponding law in force in that country of specified territory.

 Section 90A

  • The Central Government is empowered by section 90A to enter into an agreement with any specified association in the specified territory outside India and the Central Government has been authorized to make such provisions as may be necessary for adopting and implementing such agreement.
  • The provisions may be:
    1. for granting the relief in respect of:
      • income on which tax have been paid both under Income Tax Act, 1961 and Income Tax Act prevailing in that specified territory or
      • income tax chargeable under Income Tax Act, 1961 and under the corresponding law in force in that specified territory to promote mutual economic relations, trade and investment or
    2. for that avoidance of double taxation of income under Income Tax Act, 1961 and under the corresponding law in force in that country or specified territory.
    3. for exchange of information for the prevention of evasion or avoidance of income tax chargeable under the Income Tax Act, 1962 or under the corresponding law in force in that country of specified territory, or investigation of cases of such evasion or avoidance, or
    4. for recovery of income tax under Income Tax Act, 1961 and under the corresponding law in force in that country of specified territory.
  • Where the Central Government has entered in to an agreement with the specified association of any specified territory outside India for the granting relief of tax, avoidance of double taxation, then, the provisions of Income Tax Act, 1961 shall apply to the assessee to whom such agreement applies, to the extent they are more beneficial to him.
  • “Specified Association” for this section means any institution, association or body whether incorporated or not, functioning under any law for the time being in force India or the laws of specified territory outside India and which may be notified as such by the Central Government.
  • “Specified Territory” means any area outside India which may be notified as such by the Central Government for the purpose of section 90A. The provision under this section will apply to the assesses to the extent these are beneficial to them. This section provides relief in respect of double taxation in respect of countries with which India has no DTAA.

Section 91

  • In any previous year, a person resident in India, has paid tax in any country with which India has no bilateral agreement under Section 90 for the relief or avoidance of double taxation in respect of his income which accrued or arose during that previous year under the law in force in that country, by deduction or otherwise, he shall be entitled to the deduction from the Indian Income Tax payable by him calculated on such doubly taxed income at this Indian Rate of Tax or the rate of the said country which ever is lower or at the Indian rate of tax, if both rates are equal.
  • In case of assessee stated above earns income from agricultural operation in Pakistan and paid tax thereof can seek relief at rate being lower of following alternatives namely:
    • Tax actually paid in Pakistan
    • Amount computed under Indian Tax Rates.
  • If any non-resident person is assessed on his share in the income of a registered from assessed as resident person in India in any previous year and such share includes any income accruing or arising outside India during that previous year (and which is not deemed to accrue or arise in India) in a country with which there is no agreement under section 90 for the relief or avoidance of double taxation and he proves that he has paid income tax by deduction or otherwise under the law in force in that country in respect of the income so included he shall be entitled:
    • to a deduction from the Indian Income Tax payable by him or a sum calculated on such doubly taxed income so included
    • at the Average Indian Tax Rate or
    • the Average Foreign Tax Rate,
      Whichever is lower or at the Indian Tax Rate if both the rates are equal.

Double Tax Avoidance Agreement

Necessity for DTAA

  1. The need for Double Taxation Avoidance Agreement (DTAA) arises because of rules in two different countries regarding chargeability of income based on receipt and accrual, residential status etc.
  2. Double taxation is frequently avoided through DTAAs entered into by two countries for the avoidance of double taxation on the same income.
  3. The DTAA eliminates or mitigates the incidence of double taxation by sharing revenues arising out of international transactions by the two contracting states of the agreement.
  4. As there is no clear definition of income and taxability threreof, whichis accepted internationally, an income may become liable to tax in two countries.
  5. In such a case, the possibilities are as under:
    • The income is taxed only in one country.
    • The income is exempt in both countries.
    • The income in taxed in both countries, but credit for tax paid in one country is given against tax payable in other country.
  6. If the two countries do not have DTAA then in such a case, the domestic law of the country will apply. In the case of India, the provisions of Section 91 of the Income Tax Act will apply. The CBDT has clarified vide circular no. 333 dated 2nd April, 1982 that in case of a conflict in the provisions of the agreement of Tax Avoidance of double taxation and the Income Tax Act, the provisions contained in the Agreement for Double Tax Avoidance will prevail.

Taxation of Income from Air and Shipping Transport under DTAA

  1. The DTAA is based in four basic models of DTAA and they are – OECD Model Tax Convention (emphasis is on residence principle), UN Model (combination of residence and source principle but the emphasis is on source principle), US Model (its a model to be followed for entering into DTAAs with the U.S. and its peculiar to the US) and the Andean Model (mode adopted by member Stated namely Bolivia, Chile, Ecuador, Columbia, Peru and Venezuela)
  2. Income derived from the operation of Air Transport in international traffic by an enterprise of one contracting state will not be taxed in the other contracting state.
  3. In respect of an enterprise of one contracting state, income earned in the other contracting state from the operation of ships in international traffic, will be taxed in that contracting state wherein the place of effective management of enterprise is situated.
  4. However some DTA agreements contain provisions to tax the income in the other contracting state also, although at reduced rate.

 

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  • Anushi

    I am Indian resident and I have started doing business (export of services) with a NR in Europe. They are asking me my TRC to avoid double taxation. I wonder why do they need it? Can you please help? Thanks

    • thesanyamjain

      its in your favour to provide them your TRC.. From 1st April 2013, it will be necessary to provide TRC to avoid double taxation.

      Read this http://www.indiantaxupdates.com/2012/12/31/tax-residency-certificate-trc/

      • Anushi

        Thanks for quick reply. But how does double taxation come into picture between us? We just do simple business where I provide service to them (in US) and and they pay me for that in India.

        • thesanyamjain

          where do you pay your tax?? Do they deduct while remitting you the amount or you pay tax once you receive the amount??

          • Anushi

            I pay tax in India. I charge them X amount (monthly/quarterly) and they remit that X in $ into my bank account India. I pay my tax as in past like normal Indian citizen by showing it as my income (after deducting expenses etc.)

          • thesanyamjain

            May be now their government (US Govt.) also trying to levy tax on the amount they pay you, so to avoid double taxation on the same amount they are asking you TRC.

  • David Hamilton

    Hi, I am from Switzerland and dealing with home rental, villa rental and holiday villas. One Indian client has booked a apartment in Brazil through our website. When I sent them the invoice, they say that they will deduct 20% of the invoice amount as Avoidance of Double taxation. I doubt how far he is right. Can you please help?