Unit: 4 BBA (ITM) SEM:6 Advance Exports Management -II

C.P.PATEL & F.H.SHAH COMMERCE COLLEGE

(MANAGED BY SARDAR PATEL EDUCATION TRUST)
BCA, BBA (ITM) & PGDCA PROGRAMME
BBA ITM SEM 6 (Advance Exports Management -II)
UNIT 4: INTERNATIONAL TAXATION AND FEMA

UNIT 4 : International Taxation and FEMA

Reference Books:

https://taxguru.in/income-tax/relief-case-double-taxation.html

 INTRODUCTION
The basic purpose of multinational tax planning is to minimize the firms’
worldwide tax burden. Upon entering the global arena, an investor must
also contend with multiple tax systems and multiple rates of taxation. The
marginal corporate income tax rates for an MNC can vary widely across
countries. Moreover, the definition of taxable corporate income also varies
across different countries depending on what costs are deductible from
revenues in order to arrive at taxable profits.
Government usually set tax rates as a function of domestic political
considerations, but will sometimes treat foreign investors depending on the
extent that they choose to encourage or discourage foreign investment.
MNCs are specifically concerned with corporate income taxes, which are
generally conceived as taxes on return on equity capital.
Primarily, it is necessary to understand the framework for taxing income
based on two factors
 Residential status of the entity earning income

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Residential status helps determine whether the entity (person, firm,

company) is a resident or non resident of India for the financial year. An
individual who is a resident can further be considered as an 'ordinarily
resident' or a 'not ordinarily resident'. For an individual, this is determined
based on the duration of the stay in India during the financial year in
consideration.
A firm or a company is treated as a resident or non-resident depending on
whether the control and management of its affairs is situated wholly in India
or outside India during the financial year in consideration. An Indian
company is always treated as a resident. It should be noted that the
definition of residential status under the Income Tax Act, 1961 (and as
amended by the Finance Act, 2005) is not entirely similar to the definition
given under the FEMA.
 The country in which the source of income is situated
Any person who is a resident and an ordinarily resident during the financial
year of consideration is liable to pay tax in India on global income.
 Which is received or deemed to be received in India
 Which accrues or arises or is deemed to accrue or arise in India
 Which accrues or arises outside India
An individual who is a resident but not an ordinarily resident is taxed on the
first two categories of income as well as the income which accrues or
arises outside India. Non residents are liable to pay tax only in respect of
the first two categories of income. An income accrues or arises in the place
of its source.
The international tax policy is determined through complex interactions
between the host and the home governments. By convention, the host
government acts first and the home government determines policies in
accordance with the host government. In practice however, the tax policies
are more complicated especially so for MNCs having international
operations.

 DOUBLE TAXATION AVOIDANCE AGREEMENTS

In this age of globalization many organizations including individuals have
got their wings spread all over the world. Double taxation means taxation of

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same income of a person in more than one country. This results due to
countries following different rules for income taxation
There are two main rules of income taxation (a) source of income rule and
(b) residence rule.
As per source of income rule, the income may be subject to tax in the
country where the source of such income exists (i.e. where the business
establishment is situated or where the asset/property is located) whether
the income earner is a resident in that country or not.
On the other hand, the income earner may be taxed on the basis of his
residential status in that country. For example if a person is resident of a
country, he may have to pay tax on any income earned outside that country
as well.

Further some countries may follow a mixture of the above two rules.
Thus problem of double taxation arises if a person is taxed in respect of
any income on the basis of source of income rule in one country and on the
basis of residence in another country or on the basis of mixture of above
two rules.
If both rules apply simultaneously to a business entity and it were to suffer
tax at both ends, the cost of operating on an international scale would
become prohibitive and would deter the process of globalization. It is from
this point of view that Double Taxation Avoidance Agreements (DTAA)
becomes very significant.
In India, the liability under the Income-tax Act arises on the basis of the
residential status of the assessee during the previous year. In India the
residential status is the key point for determination of income tax. In case of
Residents their global income (i.e Indian Income as well as Foreign
Income) is taxable in India whereas in case of non-residents only Indian
Income is taxable. So we can say that in India residence rule is applied for
residents whereas source rule is applied for Non-residents. The residential
status of a person is determined based on the provisions of Section 6 of
Income Tax Act 1961.
DOUBLE TAXATION RELIEF
Relief against such hardship can be provided mainly in two ways (a)
Bilateral relief (b) Unilateral relief.

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Unit: 4 BBA (ITM) SEM:6 Advance Exports Management -II

BILATERAL RELIEF
The governments of two countries can enter into agreement to provide
relief against double taxation, worked out on the basis of mutual agreement
between the two concerned sovereign states. This may be called a scheme
of 'bilateral relief' as both concerned powers agree as to the basis of the
relief to be granted by either of them.
Agreement for 'bilateral relief' may be of following two kinds
a) Exemption method – A particular income is taxed in one of the both
countries and exempted in the other country.
Agreement, where two countries agree that income from various specified
sources which are likely to be taxed in both the countries should either be
taxed only in one of them or that each of the two countries should tax only
a particular specified portion of the income so that there is no overlapping.
Such an agreement will result in a complete avoidance of double taxation
of the same income in the two countries. This is known as exemption
method of relief.
b) Tax Credit method- The income is taxed in both the countries as per
the treaty and the country of residence will allow the tax credit / reduction
for the tax charged in the country of source.
The agreement that does not envisage any such scheme of single taxability
but merely provides that, if any item of income is taxed in both the
countries, the assessee should get relief in a particular manner.' Under this
type of agreement, the assessee is liable to have his income taxed in both
the countries but is given a deduction, from the tax payable by him in India,
of a part of the taxes yield by him thereon, usually the lower of the two
taxes paid. This is known as tax credit method of relief.
In practice the former type of agreement also works in the same way as the
latter. Bilateral agreements ensure that either country is to refrain from
taxing the whole or part of the income only if the other country has kept to
its part of the bargain. This can be only proved by producing the
assessment order in that country which will, naturally, take time. Moreover,
even in these agreements, there is a provision that if any item (not being
covered by specific provisions) is chargeable to tax in both countries, each
country should allow abatement to the doubly taxed income. Thus, even in
an avoidance agreement, generally, the income may get taxed in both

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places but the assessee is able to get the benefit of the collection of the
appropriate tax being kept in abeyance or by way of relief in the form of
deductions later on proving that he has paid tax thereon in the other
country as well. The relief under either of these types of agreement
depends on an agreement between the countries concerned.

UNILATERAL RELIEF
The above procedure for granting relief will not be sufficient to meet all
cases. No country will be in a position to arrive at such agreement as
envisaged above with all the countries of the world for all time. The
hardship of the taxpayer, however, is a crippling one in all such cases.
Some relief can be provided even in such cases by home country
irrespective of whether the other country concerned has any agreement
with India or has otherwise provided for any relief at all in respect of such
double taxation. This relief is known as unilateral relief.
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.

 DOUBLE TAXATION RELIEF PROVISIONS IN INDIA

Many a times, it is seen that in case of residents, the income tax has been
paid in other countries on their income abroad (i.e Foreign Income) and on
the same income they are also required to pay tax in India. In such cases,
there are provisions of providing relief from double tax. Basically there are
two sections (i.e section 90 and section 91) in Income Tax Act 1961, which
provides relief from Double tax.
The application of section 90 and 91 can be explained with the help of the
following diagram.

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As can be seen from the above diagram that section 90 is applicable in

cases where India has entered into a Bilateral agreement with other
country and section 91 is applicable in case where there is no such bilateral
agreement (i.e there is unilateral agreement)
As of now India has entered into DTAA with 93 countries and Limited
Agreements with 8 Countries. Where the Central Government has entered
into an agreement with the Government of any country outside India or
specified territory outside India, for granting relief of tax, or as the case may
be, avoidance of double taxation, then, in relation to the assessee to whom
such agreement applies, the provisions of this Act shall apply to the extent
they are more beneficial to that assessee.

WHERE THERE IS AGREEMENT WITH FOREIGN COUNTRIES

(SECTION 90) [BILATERAL RELIEF]
The Central Government may enter into an agreement with the government
of any country outside India to provide for the following:
a. A relief in respect of income on which both income-tax under this Act
and income-tax in that country have been paid, or
b. The type of income which shall be chargeable to tax in either country
so that there is avoidance of double taxation of income under this Act
and under the corresponding law in force in that country.
In addition the central government may enter into an agreement to provide:
1. For exchange of information for the prevention of evasion or
avoidance of income-tax chargeable under this Act or under the

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corresponding law in force in that country, or investigation of cases of

such evasion or avoidance, or
2. For recovery of income-tax under this Act and under the
corresponding law in force in that country.
The section as originally introduced w.e.f. 1-4-1962 gave the authority to
the government only in respect of the matters mentioned at (a) and (b)
above. The section was substituted w.e.f 1-4-1972 and extended the scope
of the agreements by including matters mentioned in (i) and (ii) above as
well.
Situations could arise where due to subsequent amendments; the statute
law is more beneficial than the provision in the treaty. Since the tax treaties
are intended to grant tax relief and not to put residents of a contracting
country at a disadvantage, vis-a-vis other taxpayers, sub-section (2j was
inserted by the Finance (No.2) Act, 1991 with retrospective effect from 1st
April, 1972, to clarify that any beneficial provision in the law will not. be
denied to a resident of a contracting country merely because the
corresponding provision in the tax treaty is less beneficial.

Method of Giving Relief from Double Taxation

Relief from double taxation is provided by abatement on the basis of mutual
agreement between two states concerned whereby the assessee is given
relief by credit/ refund in a particular manner even though he is taxed in
both countries. Relief may be in the form of credit [or tax payable in another
country or by charging tax at lower rate.
The procedure to be adopted by the authority" for granting relief is to
determine in the first place, the total income of the person liable to tax in
India in accordance with the provision, of the Income-tax Act, and then
allow relief as per the terms of the tax treaty entered with the other
contracting country where the income has suffered double taxation.
Almost every treaty provides that the tax paid in the contracting country
should be deducted from the tax payable by the assessee in the assessing
country on the income taxable in both the countries- The treaty generally
stipulates which country will grant relief and the manner and extent of the
relief on the various heads of income. For example, income from
immovable property is taxed in the source country where it is situated, but

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the country of residence of the owner can also tax the same income unless
the tax treaty between the countries expressly provides for exclusion of the
property income from being taxed in the country of residence of the
assessee. Relief can however be claimed and given in terms of tax treaty
on providing- proof of payment or at least proof of assessment.
Relief cannot be granted unless the income which has been taxed in one of
the contracting countries has also suffered tax in the other contracting
country. Proof has to be provided of the income having suffered double
taxation. If there is no tax treaty with the country levying double taxation
then relief can be granted unilaterally under section91.

 FOREIGN EXCHANGE MANAGEMENT ACT (FEMA), 1999

Foreign exchange transactions were regulated in India by the Foreign
Exchange Regulation Act (FERA), 1973. This Act also sought to regulate
certain aspects of the conduct of business outside the country by Indian
companies and in India by foreign companies.
The FERA was widely described as a draconian and obnoxious law.
Following the economic liberalization ushered in 1991, some amendments
to the FERA were effected in 1993.
The main objective of FERA, framed against the background of severe
foreign exchange problem and the controlled economic regime, was
conservation and proper utilization of the foreign exchange resources of
the country.
There was a lot demand for a substantial modification of FERA in the light
of the ongoing economic liberalization and improving foreign exchange
reserves position.Accordingly, a new Act the Foreign Exchange
Management Act (FEMA), 1999, replaced the FERA.
The FEMA, which came in to effect from January 1, 2000, extends to the
whole of India and applies to all branches, offices, and agencies outside
India, owned or controlled, by a person resident in.
The objectives of FEMA are:
 To facilitate external trade and payments
 To promote the orderly development and maintenance of foreign
exchange market.

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Dealings in Foreign Exchange etc.

Section 3 of FEMA imposes restrictions on dealings in foreign exchange
and foreign-security and payments to and -receipts from any person
outside India. Accordingly, except as provided in terms of the Act, or with
the general or special permission of the Reserve Bank, no person shall -
1. Deal in any foreign exchange or foreign security with any person other
than an authorized person;
2. Make any payment to or for the credit of any person resident outside
India in any manner;
3. Receive otherwise through an authorized person, any payment by
order or on behalf of any person resident outside India in any
manner;
4. Enter in to any financial transaction in India as a consideration for or in
association with acquisition or creation or transfer of a right to
acquire, any asset outside India by any person.
Further save as otherwise provided, in this Act, no person resident in India
shall acquire, hold, own, posses or transfer any foreign exchange, foreign
security or any immovable property situated outside India.

Holdings in Foreign Exchange etc.

Save as otherwise provided in this Act, no person resident in India shall
acquire, hold, own, possess or transfer any foreign exchange, foreign
security or any immovable property situated outside India.

Current Account Transactions

FEMA permits dealings in foreign exchange through authorized persons for
current account transactions. However, the Central Government can
impose reasonable restrictions in public interest.

Capital Account Transactions

Any person may sell or draw foreign exchange to or from an authorized
person for a capital count transaction permitted by the Reserve Bank in
consultation with the Central Government.

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The Reserve Bank may, however, without prejudice to the generality of

this, prohibit, restrict or regulate the following:
(a) transfer or issue of any foreign security by a person resident in India;
(b) transfer or issue of any security by a person resident outside India;

(c) transfer or issue of any security or foreign security by any branch, office
or agency in India of a person resident outside India;
(d) any borrowing or lending in foreign exchange in whatever form or by
whatever name called
(e) any borrowing or lending in rupees in whatever form or by whatever
name called between a person resident in India and a person resident
outside India;
(f) deposits between persons resident in India and persons resident outside
India
(g) export, import or holding of currency or currency notes;
(h) transfer of immovable property outside India, other than a lease not
exceeding five year by a person resident in India;
(i) acquisition or transfer of immovable property in India, other than a lease
not exceeding five years, by a person resident outside India;
(j) giving of a guarantee or surety in respect of any debt obligation or other
liability incurred
1. by a person resident in India and owed to a person resident outside
India; or
2. by a person resident outside India.
A person resident in India may hold, own, transfer or invest in foreign
currency security or any immovable property situated outside India if such
currency, security or property was acquired, held or owned by such person
when he was resident outside India or inherited from a person who was
resident outside India.
A person resident outside India may hold, own, transfer or invest in Indian
currency or any immovable property situated in India if such currency,
security or property was held or owned by such person when he was
resident in India or inherited from a person resident in India.
The Reserve Bank may prohibit, restrict, or regulate establishment in India
of a branch office or other place of business by a person resident outside

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India, for carrying on any activity relating to such branch, office or other
place of business.
The Reserve Bank shall not impose any restriction on the drawl of foreign
exchange payments due on account of amortization of loans or for
depreciation of direct investment in the ordinary course of business.

Export of Goods and Services

Every exporter of goods shall -
(a) furnish to the Reserve Bank or to such other authority a declaration as
specified, containing true and correct material particulars, including the,
amount representing the full export value or, if the full export value of the
goods is not ascertained at the time of export, the value which the exporter,
having regards to the prevailing market conditions expects to receive on
the sale of the goods in a market outside India;
(b) furnish to the Reserve Bank such other information as may be required
by the reserve bank for the purpose of ensuring the realization of the export
proceeds by such exporter.
For the purpose of ensuring that export value of the goods is received
without any delay, the Reserve Bank may direct any exporter to comply
with such requirements as it deems feet.
Every exporter of services shall furnish to the Reserve Bank or to such
other authorities a declaration as specified, containing the true and correct
material particulars in relation to payment for such services.
',.
Realization and Repatriation of Foreign Exchange
Where any amount of foreign exchange is due or has accrued to any
person, he shall take reasonable steps to realize and repatriate it to India
within the time and in the manner prescribed the RBI. Several exemptions
are, however, granted to this clause.

Contravention and Penalties

Under this chapter, penalty for Any kind of contravention (breach) under
this Act is liable to a penalty up to thrice the amount involved where it is
quantifiable or up to Rs. 2 lakhs where it is not quantifiable and where such
contravention is continuing one, further penalty which may extend to five

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thousand rupees for every day after the first day during which the
contravention continues. This provision is in total contrast to the respective
provision in the erstwhile (former) FERA which provided for imprisonment
and no limit on fine. Under FEMA, a person will be liable to civil
imprisonment only if he does not pay the fine within 90 days from the date
of notice and that too after formalities show cause notice and personal
hearing. If he does not respond to the notice, there can be a warrant of
arrest.

Administration of the Act

The FEMA has assigned an important role to the Reserve Bank of India in
the, administration of this Act. The rules, regulations and norms pertaining
to several sections of the Act are to be laid down by the RBI, in consultation
with the Central Government.
The Act requires the Central Government to appoint as many officers of
the Central Government as Adjudicating Authorities for holding inquiries
pertaining to contravention of the Act. There is also a provision for
appointing one or more Special Directors (Appeals) to hear appeals
against the order of the Adjudicating Authorities. The Central Government
shall also establish an Appellate Tribunal for Foreign Exchange to hear
appeals against the orders of the adjudicating Authorities and the Special
Director (Appeals).
The FEMA provides for the establishment, by the Central Government, of a
Director of Enforcement with a Director and such other officers or class of
officers as it thinks fit for taking up for investigation the contraventions
under this Act.

FERA and FEMA – A Comparison

The primary differences between FERA and FEMA are explained in the
following points:
1. FERA is an act which is enacted to regulate payments and foreign
exchange in India, is FERA. FEMA an act initiated to facilitate external
trade and payments and to promote orderly management of the forex
market in the country.

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2. FEMA came out as an extension of the earlier foreign exchange act

FERA.
3. FERA is lengthier than FEMA, regarding sections.
4. FERA came into force when the foreign exchange reserve position in
the country wasn’t good while at the time of introduction of FEMA, the
forex reserve position was satisfactory.
5. The approach of FERA, towards forex transaction, is quite conservative
and restrictive, but in the case of FEMA, the approach is flexible.
6. Violation of FERA is a non-compoundable offence in the eyes of law. In
contrast violation of FEMA is a compoundable offence and the charges
can be removed.
7. Citizenship of a person is the basis for determining residential status of
a person in FERA, whereas in FEMA the person’s stay in India should
not be less than six months.
8. Contravening the provision of FERA may result in imprisonment.
Conversely, the punishment for violating the provisions of FEMA is a
monetary penalty, which may turn into imprisonment if the fine is not
paid on time.

COMPARISON CHART
BASIS FOR FERA FEMA
COMPARISON
Meaning An act promulgated, to FEMA an act initiated to
regulate payments and facilitate external trade
foreign exchange in India, and payments and to
is FERA. promote orderly
management of the forex
market in the country.
Enactment Old New
Number of 81 49
sections
Introduced when Foreign exchange Foreign exchange position
reserves were low. was satisfactory.
Approach Rigid Flexible
towards forex
transactions
Basis for Citizenship More than 6 months stay
determining in India

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residential status
Violation Criminal offence Civil offence
Punishment for Imprisonment Fine or imprisonment (if
contravention fine not paid in the
stipulated time)

Question Bank:
1) Write a note on Foreign exchange management Act (FEMA) 1999.
OR
2) Write note on provisions of FAMA in India. Compare in brief between
FARA and FEMA.
OR
3) Describe the FEMA which has replaced FERA illustrating the major
changes it has brought in.
4) What are the provisions of double taxation relief in India? Explain
methods of giving relief from double taxation.
OR
Explain provisions of section 90 and 91 of Income Tax Act regarding
relief from double taxation. Explain methods of giving relief from
double taxation.
5) Write note on Method of Giving relief from Double Taxation.
6) Write a note on: Double taxation Avoidance agreement.
7) What is double taxation? How/In what ways relief against it can be
provided?
OR
8) What you mean by double taxation and double taxation relief?
Explain bilateral relief and unilateral relief
DISCLAIMER
THIS STUDY MATERIAL HAS BEEN COMPILED BY DR MITTAL THAKKAR TO
SUPPLEMENT THE STUDENTS IN THE PROCESS OF TEACHING & LEARNING
WITHIN THE CLASS ROOM. STUDENTS ARE ALSO REQUIRED TO USE OTHER
SOURCES LIKE LIBRARY & REFERENCE BOOKS; MOREOVER THEY SHOULD
CONSULT THE SUBJECT TEACHER FOR THE SOLUTION OF THEIR PROBLEMS
IN ORDER TO ENHANCE THEIR SUBJECT KNOWLEDGE.

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