DOUBLE TAXATION RELIEF

Introduction

In any country the tax is levied based on 1) Source Rule and 2)

the Residence Rule. The Source Rule holds that income is to be taxed in the
country in which it originates irrespective of whether the income accrues to a
resident or a non – resident whereas the Residence Rule stipulates that the
power to tax should rest with the country in which the taxpayer resides. If
both rules apply simultaneously to a business entity and it were to suffer tax
at both ends. It is from this point of view that Double Taxation Avoidance
Agreements (DTAA) becomes very significant.
 Double Taxation Relief
 A condition in which two or more taxes may need to be paid for the same
asset, financial transaction or income is known as double taxation.
 It generally takes place due to the overlapping of the tax laws and
regulations of different countries.
 Double taxation occurs when a taxpayer is charged income tax, both at his
country of residence as well as in the country where the income is
generated.
 To mitigate the double taxation of income the provisions of double
taxation relief were made.
 The double taxation relief is available in two ways one is unilateral relief
and other is bilateral relief.
 Double Tax Avoidance Agreement (DTAA)
 Double Tax Avoidance Agreement is a kind of bilateral treaty or
agreement, between Government of India and any other foreign country
or specified territory outside India.
 Such treaty or agreement is permissible in terms of Article 253 of the
Constitution of India.
 India has entered into Double Tax Avoidance Agreements with 65
countries, including U.S.A, Canada, U.K, Japan, Germany, Australia,
Singapore, U.A.E, and Switzerland.
 The tax treaties offers relaxation from double taxation, by providing
release or by providing credits for taxes paid in one of the countries.
Basically, there are two sections (Section 90 and Section 91) in the 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.
Bilateral Relief [Section 90]
The Government of India enters into DTAA with other country
for avoidance of double taxation by devising mechanism to
grant relief as per mutual agreement.

Methods of Bilateral Relief :

(1) Exemption Method : A particular income is taxed in

one of the both countries and exempted in the other country.
For example, for the Income from Dividend, Interest, royalty
and fees for technical services source rule is applicable in
treaty with Greece, Libyan and United Arab Republic. So for a
citizen of these 3 countries if the dividend, interest, royalty, or
fees for technical services is arising in India, then it will be
solely taxable in India only and if for a resident if such income
is arising in any of these 3 countries, then the income will
solely be taxed in these 3 countries and it will not be at all
taxable in India.
(2) 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. For example, Mr. A (an
Indian resident) has received salary from a US
company for job in US. Since Mr. A is a resident so
his global income will be taxable. In this case
source country is US (since the service has been
rendered in US) and resident country is India. So
at the time of computation of tax liability of Mr. A,
the tax paid in US will be allowed as set off
against his total tax liability but limited to the tax
payable on such foreign income at Indian tax
rates.
Unilateral Relief [Section 91]
If there is no Double Taxation Avoidance Agreement of
India with foreign country, relief can be provided in India in
respect of income taxed in foreign country on some
prescribed basis and thus, this relief is known as unilateral
relief.

Conditions for applicability : The assessee shall be

allowed relief if all the following conditions are fulfilled.

(a) Assessee is a resident in India during the relevant

previous year.

(b) The income accrues or arises to him outside India

during that previous year.

(c) Such income is not deemed to accrue or arise in India

during the previous year.
Unilateral Relief [Section 91]

(d) Income in question has been subjected to income tax

in the foreign country in the hands of the assessee and the
assessee has paid tax on such income in the foreign
country.

(e) There is no agreement u/s 90 for the relief or

avoidance of double taxation between India and the other
country where the income has accrued or arisen.
Unilateral Relief [Section 91]
Relief : The assessee shall be entitled to a deduction from the
Indian income tax payable by him. Lower of the following sums
shall be deductible from Indian income tax.
(1) Doubly taxed income × Indian rate of tax
(2) Doubly taxed income × Rate of tax paid in other country

Indian rate of tax means the rate determined by dividing the

amount of Indian income tax by the total income before giving
relief u/s 91.

Rate of tax of the said company means income tax and super
tax actually paid in the said company in accordance with the
corresponding laws in force in the said country after deduction
of all relief due, but before deduction of any relief due in the
said country in respect of double taxation, divided by the
whole amount of the income as assessed in the said company.