Relief from Double Taxation

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Published Date:  28-01-2024   Author:   ujjwal-goel
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India opened itself to foreign companies in 1991 by passing the LPG bill. This undoubtedly resulted in a massive boost to the country’s economic situation. However, it also had various repercussions like complexities in taxation, etc.

One of the major hindrances for foreign companies wanting to establish in India was they had to comply with the Indian taxation policies and their origin countries. Indian enterprises face the same issues when entering a foreign market. This double taxation could amount to a considerable amount of revenue loss.

Therefore, to limit double taxation, there are various types of double taxation relief to provide. If you do not know what double taxation relief is, read this article till the end. It will talk in-depth about the strategies to reduce double taxation. But first, let’s look at what double taxation is.

Understanding Double Taxation

Double taxation happens when the same income is taxed twice, first at the corporate level and then at the individual level. A classic example is the taxation of dividends.

A company pays tax on its total earnings, and when it distributes dividends to shareholders, the dividend income is taxed again in the hands of the shareholders. Similarly, in the context of international taxation, non-residents may face double taxation on their income earned in a foreign country and their country of residence.

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However, mechanisms such as tax credits or international tax treaties can help minimise this issue. For instance, in the case of dividends, tax deducted at source (TDS) is levied, but investors can often claim a tax credit to offset the double taxation effect.

What are the Types of Double Taxation?

Double taxation can happen in various forms. Some of the major types are given as follows:

1. Corporate Double Taxation

Corporate double taxation occurs when the earnings of a corporate entity are taxed twice at distinct levels despite being the same income. Initially, the net income of a corporation is subjected to corporate tax. Subsequently, when this income is distributed to shareholders as dividends, it undergoes taxation again in the form of dividend tax.

Debates surrounding corporate double taxation revolve around whether taxing both corporate earnings and dividends is justified. Opponents argue that as shareholders are owners of the corporation, subjecting dividend income to taxation represents a double taxation of the same income stream.

2. International Double Taxation

International double taxation primarily affects multinational entities operating in jurisdictions other than their home country. However, it can also impact individuals earning foreign income. This situation arises when foreign income is taxed both in the country where it is earned and in the country where an investor or individual resides.

The implications of international double taxation include an increased tax burden on investors, potential hikes in the prices of goods and services, and violations of the principle of tax fairness. Addressing these challenges often involves mechanisms such as international tax treaties and credits to alleviate the impact of double taxation on a global scale.

What is Double Taxation Relief?

Numerous countries use double taxation relief to reduce the tax burden on people and enterprises whose earnings are taxed in more than one jurisdiction. This occurs when a taxpayer makes money in a foreign nation and is obligated to pay taxes on that income in both the foreign country where the income was generated and their home country.

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The purpose of double taxation relief is to avoid taxing the same income twice, either through tax credits, exemptions, or bilateral treaties. Double taxation relief facilitates international economic cooperation by ensuring the mitigation of double taxation.

What are the Types of Double Taxation Relief?

Double taxation relief is implemented through two primary avenues, each governed by specific provisions in the Income Tax Acts. Some of the types of double taxation relief are:

1. Bilateral Tax Relief

When two countries establish a mutual agreement, double taxation relief is determined according to the terms specified in the agreement. There are two main methods for achieving relief in this context:

A. Exemption Method

This approach, supported by Section 90 of the Income Tax Act, allows specific income to be taxed in one of the countries involved and then exempted from taxation in the other country.

B. Credit Method

The credit method, as outlined in Section 90 of the Income Tax Act, involves the taxation of income in both the country of origin and the country of residence. The taxpayer is granted a credit or deduction for the tax paid in their country of residence.

Example: If Country A and Country B have a tax agreement under Section 90, an individual or business earning income in both countries may benefit from either exemption or tax credits, depending on the terms of the agreement.

2. Unilateral Relief

In the absence of a mutual agreement between your home country and another, unilateral relief is provided independently by your home country. The relevant provisions in the Income Tax Acts are as follows:

Income Tax Act of 90A

Section 90A deals with the unilateral relief offered by the government when there is no tax agreement with a foreign country.

Example: If Country A and Country C do not have a bilateral tax agreement, Country A may unilaterally provide relief to its residents facing double taxation on income earned in Country C.

What are the Methods for Double Taxation Relief for Corporations?

Numerous tactics are used to give assistance to firms experiencing double taxes. Some of the methods of double taxation relief for corporations are:

1. Legislative Measures

Legislation is a fundamental approach to address double taxation. Passing laws that eliminate or reduce the burden of double taxation creates a more investor-friendly environment.

Providing tax exemptions or credits for corporate income that has already been taxed at the company level encourages investors to contribute more capital, particularly in the case of established businesses with lower capital requirements.

2. Move-Through Taxation

Move-through taxation involves structuring the company as a partnership, Limited Liability Company (LLC), or sole proprietorship and implementing pass-through taxation features. In such structures, profits are not distributed as dividends; instead, they are passed through to the owners or partners, who then report the income on their individual tax returns. While effective for small businesses, this method may have limitations for larger corporations.

3. Lack of Dividend Payments

Another strategy to mitigate double corporate taxation involves forgoing dividend payments and retaining profits within the company to fuel growth. This approach is particularly effective for businesses in the growth stage of their life cycle.

4. Individual Personal Income Tax Status

Corporations can explore aligning the personal income tax status of individual shareholders with the company’s structure. For instance, shareholders in smaller businesses can be hired as employees or in larger businesses.

They may serve as executive directors, receiving salaries. While this income is subject to personal income tax, it is not considered double taxation.

What is the Relief on the Double Taxation Relief on Double Taxation Abroad?

Relief from double taxation on foreign income is provided through India’s domestic tax laws, specifically under Sections 91 and 90A of the Income Tax Act. Section 91 offers relief for taxes paid in a foreign country on income not included in the Indian company’s total income.

On the other hand, Section 90A provides relief for taxes paid in a foreign country where no Double Taxation Avoidance Agreement (DTAA) exists between India and that country. For instance, if an Indian company faces taxation in both India and France without a DTAA, Section 90A allows relief for taxes paid in France.

What is the Double Tax Avoidance Agreement?

The DTAA is a bilateral agreement signed by India and other nations to prevent people from being taxed twice on the same income. If a person is a resident of one country but earns income in another, the DTAA ensures they are not subjected to double taxation. Here are the critical aspects of DTAA:

Objectives of the Agreement

  • Preventing individuals from being taxed on income earned in a foreign country while being a resident elsewhere.
  • Addressing tax implications for individuals not residing in the country where they earn income.

Application of DTAA

DTAA can be applied comprehensively or in a limited manner:

  • Comprehensive DTAA: Encompasses tax benefits on income, capital gains, and all sources of income.
  • Limited DTAA: Offers tax relief on specific areas like income from shipping, income from air transport, and income from estate, gift, or inheritance.

Incomes Exempted Under DTAA

In the context of India, NRIs benefit from DTAA provisions, avoiding double taxation on the following income sources:

  • Salary Received
  • Payment for Services Rendered
  • Interest on Fixed Deposits
  • Income from House Property
  • Interest on Savings Bank Account
  • Capital Gains

Double Tax Avoidance Agreements are crucial in facilitating cross-border economic activities. It ensures fair and equitable taxation for individuals with international income.

Conclusion

Double taxation relief is a crucial component of international taxes and local financial systems. These procedures, whether through bilateral agreements or otherwise, seek to enhance justice.

Nations attempt to establish a hospitable atmosphere for businesses and individuals to develop worldwide by delivering relief through different means, such as move-through taxes, exemptions, and tax credits, in order to minimise the hardship of being taxed twice on the same revenue.

Also Read: GST Calculator Online – Simplify Your Daily Finances And Taxes

Frequently Asked Questions 

Q1. How do you Claim Relief Under DTAA?

The taxpayer is required to submit Form 67 to avail benefits under the Double Taxation Avoidance Agreement (DTAA). The Income Tax Act offers relief to taxpayers by providing tax credits, ensuring they are not subjected to paying income tax twice on the same income.

Q2. How do you get Double Taxation Relief?

The DT-Individual form enables individuals to seek relief at the source from UK Income Tax on pensions, purchased annuities, royalties, and interest originating from UK sources under the Double Taxation treaty between the UK and their country of residence.

Q3. What is Article 25 Relief From Double Taxation?

Article 25(2) states that if the responsible authority of the Contracting State where the matter is brought believes the case is justified but is unable to settle it unilaterally, it is required to engage in negotiations with the competent authority of the other Contracting State in order to reach an agreement.

Q4. What is DTAA Between India and the UK?

The Double Taxation Avoidance Agreement between the UK and India assumes crucial importance in the modern landscape of global trade and taxation. Prior to the establishment of this treaty, taxpayers encountered the challenge of being doubly taxed on their income, posing hurdles to economic interactions between the two nations.

Q5. What  is the Form of Double Taxation Avoidance?

Individuals must make an application to the income tax authorities using Form 10FA in order to acquire a Tax Residency Certificate. Upon successful processing of the application, the certificate will be issued in Form 10FB.

Q6. What Is DTAA Between India and the USA?

According to the DTAA, the amount would be taxable in the US if interest income arises in India and the amount belongs to a US Resident. However, such interest may be taxable in India under the Indian Income Tax Act (i.e. in the contracting state where the interest arose).

Q7. What is Article 7 in DTAAa?

Article 7, focusing on business profits, stipulates that the profits of an enterprise in one Contracting State are taxable solely in that State unless the enterprise operates in the other Contracting State through a permanent establishment located there.

Q8. What is the DTAA Rate in India?

The applicable TDS rates on interest earnings typically hinge on the agreement between countries. These rates can vary from 10% to 20%, reaching a maximum of 25%. It’s advisable for individuals to verify the specified rates in the DTAA India for the respective countries involved.

Q9. Is Income Earned in the UK Taxable in India?

Foreign income, accruing or arising outside India in any financial year, is subject to income tax in that year, regardless of whether it is received or brought into India. The liability for income tax persists even if the foreign country restricts the remittance of income.

Q10. How Many Countries Have DTAA With India?

India has established Double Taxation Avoidance Agreements (DTAA) with a total of 88 countries; as of now, 86 of these agreements are currently in force.

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Ujjwal Goel

Ujjwal Goel is a B2B Technical and Finance Writer. With 5 years of experience, he has established himself as a skilled and knowledgeable blogger and content creator. Hailing from a BBA background, he is passionate about the Technical and Finance field and strives to create engaging, informative, and thought-provoking content for his readers. His writing style is conversational and informative, and he is committed to delivering high-quality work that meets the needs of his clients and readers. When he is not writing, he enjoys binge-watching Netflix or traveling

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