The term double taxation relief is an initiative launched by the Government of India, which allows a person to escape the clutches of being taxed twice for the same income. This incident mainly takes place for non-resident Indians, where they first pay taxes on income generated in India and then are once again required to pay taxes in their home country as well. Double Taxation Relief is an arrangement whereby the person is liable to pay taxes only once. The provisions of this arrangement further segregated under two sections, namely, Double Taxation Avoidance Agreement (DTAA) and no Double Tax Avoidance Agreement. Here We’ll discuss about Double Taxation Relief in India in a very simple way, so that a layman can understand with ease.
Double Tax Avoidance Agreement (DTAA)- Section 90
Under this provision, the incidence of Double Taxation can be avoided by two different methods-
- a) Tax Credit Method- Under this method, a tax payer pays taxes in the country where his income has originated. In return, he receives tax credits which can later be used as a deduction while paying taxes in the home country. Let us take an example to make things clear. Suppose, Mr. Arjun has generated an income of INR 50, 000 in the US and is a resident of India. So, Mr. Arjun will be required to pay taxes in the US and receive a tax credit in return. Now when Mr. Arjun will file his return in India, he can use the same tax credit as a deduction as taxes on a part of his income were already charged by the US Government.
- b) Exemption Method- This is a relatively simple method where a tax payer is required to pay tax on his income in either one of the countries. The moment he has paid his tax on the income, the amount becomes tax free in the other country as well.
Relief where no Double Taxation Agreement exists- Section 91
Now, there may be situation where India may not have a DTA agreement with a particular country. In that case, relief will only be offered to residents of India. The income which has been taxed in the other country will be compared as per taxability in India and the lower of the two shall be given as a deduction.
There is a small twist under Section 91. The Government of India CAN offer a relief to a tax payer in respect of double taxation, whether or not there exists a treaty between India and the other country. The following conditions will offer unilateral relief to a tax payer in India:
- The person has the status of an ‘Indian Resident’ in the previous year.
- The person or organization has paid taxes under the foreign laws in the foreign country.
- The nature of income should be similar to the previous year and the tax payer should have received it outside India.
- The income of the tax payer should have been taxed in India as well as the country with which India doesn’t have a DTA.
Double taxation relief under agreement between specified associations
This is an extension of Section 90, where a flexibility has been given to specified organizations within different countries to avoid the incidence of double taxation through the assistance of Central Government. The Central Government, in such respect, may notify through the Official Gazette:
- Approval of DTR (Double Taxation Relief)
- Avoidance of double taxation
- Recovery of Income Tax
- Information exchange for prevention of tax evasion.
However, it should be noticed that the arrangements under double taxation relief under agreement between specified associations is applicable in cases where one association belongs to India and the other association is situated outside of the Indian territory.