Double Taxation System in India

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Double taxation occurs when an individual is required to pay two or more taxes for the same income, asset, or financial transaction in different countries. Double taxation occurs mainly due to overlapping tax laws and regulations of the countries where
an individual operates his business. Double taxation Agreement is the systematic imposition of two or more taxes on the same income. The double liability is often mitigated by tax agreements, known as treaties, between countries.

When an Indian businessman makes a profit or some other type of taxable gain in another country, he may be in a situation where he will be required to pay a tax on that income in India, as well as in the country in which the income was made! To protect Indian tax payers from this unfair practice, the Indian government has entered into tax treaties, known as Double Taxation Avoidance Agreement (DTAA) with 65 countries, including U.S.A, Canada, U.K, Japan, Germany, Australia, Singapore, U.A.E, and Switzerland. DTAA ensures that India's trade and services with other countries, as well the movement of capital are not adversely affected.

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

Under Section 90 and 91 of the Income Tax Act, relief against double taxation is provided in two ways:

Unilateral Relief from Double Taxation

Under Section 91, the Indian government can relieve an individual from double taxation irrespective of whether there is a DTAA between India and the other country concerned. Unilateral relief may be offered to a tax payer if:
  1. The person or company has been a resident of India in the previous year.
  2. The same income must be accrued to and received by the tax payer outside India in the previous year.
  3. The income should have been taxed in India and in another country with which there is no tax treaty.
  4. The person or company has paid tax under the laws of the foreign country in question.

Bilateral Relief from Double Taxation

Under Section 90, the Indian government offers protection against double taxation by entering into a DTAA with another country, based on mutually acceptable terms. Such relief may be offered under two methods:
  1. Exemption method – This ensures complete avoidance of tax overlapping.
  2. Tax credit method – This provides relief by giving the tax payer a deduction from the tax payable in India.
India has entered into DTAA with 65 countries including countries like U.S.A., U.K., Japan, France, Germany, etc. These agreements provides for relief from the double taxation in respect of incomes by providing exemption. The countries with which India has signed the DTAA along with the year in which it was signed are given below:

CountryYear
Australia1993-94
Austria1963-64
Bangladesh1993-94
Belarus1999-2000
Belgium1989-90; 1999-2000
Brazil1994-95
Bulgaria1997-98
Canada1987-88; 1999-2000
China1996-97
Cyprus1994-95
Czechoslovakia1986-87; 2001-02
Czech Republic1998-99
Denmark1991-92
Egypt1970-71
Finland1985-86; 2000-2001
France1996-97
Germany1996-97
Greece1964-65
Hungary1989-90
Indonesia1989-90
Israel1995-96
Italy1997-98
Japan1991-92
Jordan2001-02
Kazakhstan1999-2000
Kenya1985-86
Korea1985-86
Kyrgyzstan2001-02
Libya1983-84
Malaysia1973-74
Malta1997-98
Mauritius1983-84
Morocco2000-01
CountryYear
Mongolia1995-96
Namibia2000-01
Nepal1990-91
Netherlands1990-91
New Zealand1988-89
Norway1988-89
Oman1999-2000
Philippines1996-97
Poland1991-92
Portugal2000-01
Qatar2001-02
Romania1989-90
Russian Federation2000-01
Singapore1995-96
South Africa1999-2000
South Korea1985-86
Spain1997-98
Sri Lanka1981-82
Sweden1990-91; 1999-2000
Switzerland1996-97
Syria1983-84
Tanzania1983-84
Thailand1988-89
Trinidad and Tobago2001-02
Turkey1995-96
Turkmenistan1999-2000
United Arab Emirates1995-96
United Kingdom1995-96
United States1992-93
Uzbekistan1994-95
Vietnam1997-98
Zambia1979-80
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.


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Last Updated on 6/22/2015