Study Content

Patna Women’s College (Autonomous)

B.com
Semester V
CORPORATE TAX PLANNING
Unit 3
DTAA

Prepared by
Nikky Tiwary
Assistant Professor
Department of Commerce
Income Tax for NRIs: Taxable Income

Who is a Non- Resident?

“Non-Resident” is a person who has not been residing in India for a specified period of
time. The Residential Status of an individual in a given year determines whether the
individual is Resident or Non-Resident for the year.

How do I determine my Residential Status?

Residential status of an individual is determined on the basis of the number of days an

individual has physically stayed in India. Residential status has nothing to do with the
nationality or domicile of an individual. It may also happen that an Indian, who is
citizen of India, may be a non-resident for Income Tax purposes in a particular year
and an American citizen may be resident in India for Income Tax purposes in a
particular year.

Types of Non-Resident

Under Income Tax Act 1961, non-resident is broadly classified under the following
three heads:

 Non-Resident Indian/Person of Indian Origin

 Foreign Company
 Other Non-Resident Person

Salient Features

 Residential status is to be determined for each previous year i.e. the financial
year under consideration. Residential status of assessment year is not relevant.
Also you may be a resident in a previous year and non-resident in another.
Hence it has to be determined for each previous year.
 It is very much possible to have dual residential status in a previous year, i.e. you
may be a resident in India in the previous year and also resident in some other
country say United States. It may happen because of different set of rules laid
down by countries for determination of Residential status.

Who is Non Resident Indian

 Non-Resident Indian (NRI)” is an individual who is a citizen of India or a person
of Indian origin and who is not a resident of India

How to determine Residential Status

So as defined above, “a non-resident is a person who is not resident in India”, therefore

we need to understand who is considered as Resident in India.

You are considered as “Resident in India” for a financial year

 If you were in India for a period of 182 days or more during the Financial year;
OR
 If you have stayed in India for 60 days in the financial year and for a total of 365
days in the preceding 4 years.

Do NRI’s have to pay taxes in India for income earned abroad?

 For Resident Individuals: Your Global income is taxable in India i.e. income
earned whether in India or outside India is taxable in India.
 For Non-Resident Indians: Only income earned or accrued in India or deemed to
be so is taxable in India.
 Double Tax Avoidance Agreement (DTAA)

The Double Tax Avoidance Agreement (DTAA) is essentially a bilateral agreement

entered between two countries. The basic objective is to promote economic trade and
investment between two Countries by avoiding double taxation.

Introduction

Double taxation ‘International Double Taxation means taxation of same income of a

person simultaneously in two different countries. Such situation arises due to countries
following different rules for income taxation.

Globally there are two main rules

(a) Source of Income rule and

(b) Resident rule

Every country has the right to tax its residents on their worldwide incomes. Further tax
is also levied by the country on income sourced/Originated in that country. This results
in double taxation of the same income.

For e.g., Mr a resident of USA has earned interest income from India, USA would tax
income based on resident rule and India would tax it based on Source rule. Double
taxation affects the trade and commerce.

DTAA is an agreement negotiated between two countries which aims to avoid double
taxation.

 Jurisdiction double taxation- one income taxed twice in two countries in the hands
of one person. Eg. Worldwide income taxed on resident rule and source rule. And
this is avoided by DTAA.

 Economical double taxation- one income taxed twice AND THIS IS avoided by
MAP (mutual agreement procedure) E.G DIVIDEND once taxed in the hands of
company and other taxed in the hands of shareholders.

DTAA or Double Taxation Avoidance Agreement is an agreement that India signed with
many other countries to avoid levying taxes twice on the same income.
Double taxation is possible when assesse is resident of one country and earn income from
another country.
This provision helps taxpayers accumulate income savings by paying the tax in only one
country. DTAAs can be comprehensive in many countries.
The tax structure usually depends on the type of employment or business of a citizen in
a specific country. The common categories include salary, services, capital gains, fixed
deposit earnings, property, investment, etc.

Objectives of entering into DTAA.

1. To protect tax payers against double taxation

2. To encourage free flow of international trade and capital

3. To prevent discrimination between tax payers.

4. To encourage transfer of technology

5. To prevent discrimination between tax payers

Nature of DTAA

 Comprehensive: Comprehensive DTAA’s are those which cover almost all

types of incomes covered by any model convention.
 Limited: Limited DTAA’s are those which are limited to certain types of
incomes only.

Advantages of DTAA

 The intent behind a Double Tax Avoidance Agreement is to make a

country appear as an attractive investment destination by providing relief
on dual taxation.
 This relief is provided by exempting income earned in a foreign country
from tax in the resident nation or offering credit to the extent taxes have
been paid abroad.
 Reducing the possibility of tax evasion in both or either of the signatory
countries
Tax rate concessions

Further section 90 of the Act also empowers the central government to enter DTAA for
achieving the following objectives:

1. Avoidance of double taxation.

 2. Granting of Relief from double taxation—Without creating opportunities for non-
taxation, tax evasion or tax avoidance or treaty shopping.

3. Exchange of information to avoid tax evasion

4. Recovery of Income tax.

Important notes:

Double taxation means the same income getting taxed twice in the hands of same assesses.

DTAA means a Tax Treaty between two or more countries to avoid taxing the same
income twice.

Any country tax income on the basis of two rules i.e; Resident Rule and Source rule

Suppose Mr. A is Resident of India and deriving income from UK , then India will charge
tax on such income on resident rule and also UK will charge tax on the same income on
source rule .

Treatment of Double Taxation Avoidance Agreement

There are two ways of implementing DTAA:

1. By either exempting the income earned abroad in its entirety

2. By providing credit to the extent of tax already paid in the other country

There are two type of Double Taxation relief

UNILATERAL RELIEF----NO DTAA----SECTION 91----NO AGREEMENT

BILATERAL RELIF-----DTAA----SECION 90 AND SECTION 90A-----TAX TREATY

OR TAX CONVENTION-----AGREEMENT BETWEEN 2 COUNTRIES.

SECTION 90---AGREEMENT BETWEEN GOVERENMENT OF 2 COUNTRIES

SECTION 90A----AGREEMENT BETWEEN SPECIAL ASSOSIATION OF ANY 2

COUNTRIES.

In India Double taxation relief is provided by combination of two methods.

Section 90: Agreement with Foreign Countries (DTAA)

Central government can enter into agreement with the govt of foreign country.

a. For granting relief for double taxed income

b. Exchange of information with each other for prevention of tax evasion.

The DTAA covers provisions to grant benefit of relief of taxation of various types of
income, e.g.
(i) Interest income
(ii) Dividend income
(iii) Employment earnings
(iv) Capital gains
(v) Consultancy and royalties’ income
(vi) Business income
(vii) Any other type of income

Income Tax Act offers multiple reliefs to the Assesses.

Relief under section 90 and Section 91 of Income Tax Act, 1961 If a person who is resident
in India in any previous year, in respect of his income, accrued or arose outside India has
paid tax on such income in any country outside India, he shall be entitled deduction from
the Income Tax payable by him of a sum calculated on such doubly taxed income:
Under section 90 if the country in which tax is paid has entered double taxation avoidance
agreement with the Government of India. Under
Section 91 if the country in which tax is paid has not entered into any agreement with the
Government of India.

Types of Relief

Tax relief can be provided in two ways:

Relief under section 90 (bilateral agreement and DTAA)

Relief under section 90 may be claimed only by an Indian resident if India has entered
into a DTAA with the other country from where anyone has earned income. If there is a
DTAA with such country, then tax relief can be claimed u/s 90.

Relief under Section 91 (Unilateral agreement and NO DTAA)

Relief under this section may be claimed by an Indian resident only if there is no DTAA
with the other country from where you have earned income. Such relief is given
voluntarily by India in case of unilateral agreements.
a. Bilateral Relief: When two countries agree to offer relief from double taxation, then
such relief shall be calculated in accordance with the mutual agreement between two such
countries. Bilateral relief may be granted by either of the following methods:

Exemption Method: Income is taxed in only one country and exempted from tax in the
other country. Two countries enter into an agreement that the income which is otherwise
taxable in both the countries shall be taxed in one of the countries or that each of the two
countries shall tax a specific portion of the income to avoid any double taxation.

Tax Credit Method: Under this method, income is taxed in both countries, and the foreign
tax credit shall be granted to the taxpayer in his country of residence.

b.Unilateral Relief: Section 91 of Income Tax Act 1961 provides for Unilateral Relief
which states that when there is no DTAA between two countries, the relief shall be
provided by the country of residence.

SECTION 91---NO DTAA ---unilateral -----DOUBLE TAXATION RELIEF

A. ASSESSEE SHOULD BE RESIDENT OF INDIA

B. INCOME DERIVED FROM FOREIGN COUNTRY

C. TAX SGOULD HAVE BEEN ALREADY DEDUCTED

D. THERE SHOULD BE NO DTAA

List of Documents Required for Claiming DTAA Benefits

Assesses (NRI’s) are obligated to submit the mentioned documents to gain benefits and
provisions laid under DTAA.
These papers are-
 Indemnity or self-declaration form
 Tax Residency Certificate
 PAN card copy (self-attested)
 Self-attested visa
 Passport xerox(self-attested)
Apart from the mentioned documents, an individual is obligated to submit the Tax
Residency Certificate to a deductor to be eligible to claim benefits under this DTAA
agreement.
They have to submit Form 10FA to apply for a Tax Residency Certificate under sections
90A and 90 of the Income Tax Act. After successful verification and processing of the
application, the certificate will be issued under Form 10FB.

2 WAYS OF TAX RELIEF

1. TAX EXEMPTION—ONLY ONE COUNTRY WILL CHARGE TAX.

2. TAX CREDIT---BOTH COUNTRY WILL CHARGE TAX BUT ONE

HOME/RESIDENT COUNTRY WILL GIVE REFUND/REBATE/RELIEF OF
THE SAME AMOUNT.

NOW IN TAX EXEMPTION METHOD ONLY ONE COUNTRY WILL CHAREGE

TAX----ON THE BASIS OF THE PE i.e PERMANENT ESTABLISHMENT.

TAXABILITY OF FOREIGN INCOME

1. RESIDENT

A. DTAA---SECTION 90/90A APPLIES—DTAA RATE OR INCOME TAX

RATE WHICHEVER IS LOWER

B. NO DTAA—SECTION 91 ---TAX REBATE

2. NON RESIDENT----NOT TAXABLE

WHAT IS PERMANENT ESTABLISHMENT?

Permanent Establishment means a fixed place of business through which the business
activities of the business is wholly or partially carried on. Every DTAA has specific clause
which will deal with an explanation of PE for the purpose of DTAA.

Business income of non resident will not be charged in India unless such non resident has
a permanent establishment in India.

PE INCLUDES----fixed place of business

1. A place of management
 2. A branch

3. An office

4. A factory

5. A workshop

6. A sales outlet

7. A warehouse

8. A mine, gas or oil well, or other natural source of income.

Under tax exemption method, income is taxed in one country and exempt in another
country and decision is based on permanent establishment.

Under tax credit method income is taxable in both the country and resident country will
allow tax credit of tax paid in source country.

NOTE: IF THERE IS A CONFLICT IN GENERAL PROVISION of INCOME TAX

PROVISION AND DTAA THEN DTAA WILL APLLY BUT SUBJECT TO GAAR

1. PROVISION OF DTAA OR INCOME TAX WHICHEVER IS MORE

BENEFICIAL TO THE ASSESSEE SHALL APPLY SECTION 90(2)
exception is foreign company

2. NON RESIDENT TO WHOME DTAA APPLIES SHALL BE ENTILTLED

TO TAX RELIEF AGAINST TRC (TAX RESIDENT CERTIFICATE)

Calculation of Relief under section 90/91

Relief allowed under section 90/ 91 is lower of following accounts
1) Tax paid on double-taxed income outside India.
2) Tax payable on double-taxed income under Income Tax Act.
 Provisions of DTAA or Income tax act whichever is more valuable for the assesses
will be applicable. However provision of GAAR shall be applicable even if the
provisions are not beneficial for the company.
 Exception of the above rule, for foreign company…always higher rate will be
applicable.
GAAR
The General Anti-Avoidance Rule (GAAR) is an anti-tax avoidance law in India. It
came into effect on 1st April 2017.

General Anti-Avoidance Rule – Introduction

 The GAAR provisions come under the Income Tax Act, 1961.
 The Department of Revenue under the Finance Ministry frames the rules under
GAAR.
 It is specifically aimed at cutting revenue losses
 It came into effect in 2017 and is applicable from the assessment year 2018 – 19.