Double Taxation is one of the major problems in the system of taxation. An income can be taxed twice in 2 different places and such type of taxation is termed as double taxation.
Mostly the income earned in different countries by a resident of the concerned country often falls under the category of double taxation. The income pertaining to which tax is reduced and exempted, the concerned country of residence would not consider these income while evaluating the tax to be levied on the remaining income for the foreign residents in India to avoid double taxation. In case of the tax liabilities of the Indians residing in other countries on income in other countries, they are allowed a credit pertaining to the tax, which is paid for such kind of income up to the taxable amount paid in the other country in order to avoid double taxation. In many countries the double taxation is particularly avoided in order to encourage the people to pay their taxes and the help the economy to function properly. Double taxation is very discouraging in nature as it poses several problems such as people not declaring their income correctly, tax exile, tax evasion, even smuggling, other unlawful and restrictive trade practices, etc.
Some of the tax exemption under avoidance of double taxation:
- Sec 10(2A) for exemption on income of a partner of a firm who has separately filed his tax returns
- Sec 10(6)(ii) for exemption on income received by the diplomats, ambassador, etc
- Sec 10(6)(vi) for exemption on income received by the employees working in foreign companies outside India
The most important aspect of the double taxation is the Double Taxation Avoidance Agreements. This agreement provides a set of norms to strike a balance between tax evasion and double taxation.
The important aspects of Double Taxation Avoidance Agreements:
- Incomes generated from shipping and air based transportation are not taxable
- The minimum income generated from the managerial participation of the related companies are taxable
- Incomes generated from dividends are taxable in the place of earning as well as in the place of the origin of the individual or corporation who earned it
- Incomes generated from the interest earned in one country by an individual who is a resident of another country are taxable in both the places
- Incomes generated from royalties are sometimes taxable in the place of earning, sometimes taxable in the place of residence, and sometimes taxable in both the places
- Incomes generated from capital gains is taxable in the place where the concerned capital asset is located
- Incomes generated from professional services is taxable in the place of residence or in case the individual is residing in the place of earning it would be taxable there
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