Double Taxation System in India

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:

Country Year Australia 1993-94 Austria 1963-64 Bangladesh 1993-94 Belarus 1999-2000 Belgium 1989-90; 1999-2000 Brazil 1994-95 Bulgaria 1997-98 Canada 1987-88; 1999-2000 China 1996-97 Cyprus 1994-95 Czechoslovakia 1986-87; 2001-02 Czech Republic 1998-99 Denmark 1991-92 Egypt 1970-71 Finland 1985-86; 2000-2001 France 1996-97 Germany 1996-97 Greece 1964-65 Hungary 1989-90 Indonesia 1989-90 Israel 1995-96 Italy 1997-98 Japan 1991-92 Jordan 2001-02 Kazakhstan 1999-2000 Kenya 1985-86 Korea 1985-86 Kyrgyzstan 2001-02 Libya 1983-84 Malaysia 1973-74 Malta 1997-98 Mauritius 1983-84 Morocco 2000-01

Country Year Mongolia 1995-96 Namibia 2000-01 Nepal 1990-91 Netherlands 1990-91 New Zealand 1988-89 Norway 1988-89 Oman 1999-2000 Philippines 1996-97 Poland 1991-92 Portugal 2000-01 Qatar 2001-02 Romania 1989-90 Russian Federation 2000-01 Singapore 1995-96 South Africa 1999-2000 South Korea 1985-86 Spain 1997-98 Sri Lanka 1981-82 Sweden 1990-91; 1999-2000 Switzerland 1996-97 Syria 1983-84 Tanzania 1983-84 Thailand 1988-89 Trinidad and Tobago 2001-02 Turkey 1995-96 Turkmenistan 1999-2000 United Arab Emirates 1995-96 United Kingdom 1995-96 United States 1992-93 Uzbekistan 1994-95 Vietnam 1997-98 Zambia 1979-80

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