Double Taxation Relief-Section 90 of Income Tax Act- What you need to know?
Section 90 of Income Tax Act 1961 contains provisions relating to Double Taxation Relief to provide for tax relief from taxing an income twice. More and more numbers of Indians are going abroad to earn their bread and butter. As a result, they are earning from foreign countries and from the home country too. This gives rise to double taxation on foreign income and resident income as well. In this post, we will know What is double taxation? How does Double Taxation arise? What is Double Taxation Relief? Section 90 of the Income Tax Act 1961. What is the Double Taxation Avoidance Agreement?
⇒What is double taxation?
Double taxation means taxing the same income twice, once in the home country and another in the foreign country. This means tax is levied on the same income by both countries due to a person’s residential status and source of income. Double taxation hampers the free flow of capital and becomes a burden on taxpayers leading to a decline in foreign investments. This is not appropriate in this global village concept. To mitigate this problem the Central Government came up with Section 90 of the Income Tax Act 1961, which provides a double taxation relief to Indian citizens.
⇒How does Double Taxation arise?
The concept of double taxation arises only when the same income is taxed twice by both countries. This is very pertinent to know that there is no such international law which prohibits international double taxation. Therefore, the countries itself have to solve this problem by entering into an agreement between them.
Double Taxation may arise due to the following two reasons.
- The jurisdictional connections used by different countries that overlap each other. This means an ordinary resident in India under Income Tax Act 1961 has to pay tax in India and also has to pay tax on his income as a citizen of the USA. Here, his income is taxed both in India and USA. This is due to his residential status limitations both in India and in the USA.
- Again the Double Taxation may arise when the taxpayer or his earned income has connections with more than one country. Like when a person earns income in Japan, he has to pay tax on his income both in Japan and India. This is known as the source principle. Also, if a person’s income is accrued/generated and received in two different countries. Though the rates of tax levied by both countries may be different from each other.
⇒What is Double Taxation Relief?
To mitigate the evil of Double Taxation, the Central Government introduced the concept of Double Taxation Relief under section 90 of the Income Tax Act 1961. The main aim of this tax relief is to prohibit an income to be taxed twice.
- Double taxation arises when various sovereign countries exercise their power to levy taxes on the same income;
- This happens when an individual is taxed on the basis of his personal status like his nationality or residential status or the place where the income is earned or taxed;
- To avoid this double taxation on the same income in two different countries, the Central Govt. may enter into a double taxation avoidance agreement (DTAA) with any country outside India or specified territory outside India to grant relief in relation to income on which tax has been paid both under Indian Income Tax Act and Income Tax Act of the other country;
- Negotiation of tax treaties between different countries have become inevitable;
- These DTAA have been entered in large numbers based on OECD and UN Models.
⇒Provisions for Double Taxation Relief Under Section 90 of Income Tax Act 1961
A. To avoid this double taxation on the same income in two different countries, the Central Govt. may enter into a double taxation avoidance agreement (DTAA) with any country outside India or specified territory outside India for granting relief i.r.o:-
- Income on which tax has been paid both under Indian Income Tax Act and Income Tax Act of the other country or specified territory as the case may be; or
- Income tax chargeable under this act and under the corresponding law in force in that country or specified territory as the case may be to promote mutual economic relations, trade and investments
B. For exchange of information for the prevention of evasion or avoidance of income tax chargeable under this act or under the corresponding law in that country or specified territory as the case may be;
C. For recovery of income tax under this act and under the corresponding law in that country or specified territory as the case may be and may by notification in Official Gazette, make such provisions as may be necessary for implementing the agreement.
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⇒Double Taxation Relief Vs. Double Tax Avoidance
Double taxation relief means granting of relief in respect of income on which income tax has been paid under the Indian tax laws and also in the other country.
Double tax avoidance means avoidance of double taxation of income under the tax laws of the two countries. The Supreme Court of India has clearly pointed out the distinction between the two. In the case of avoidance of double taxation, the assessee does not have to pay the tax first and thereafter apply for relief in the form of refund.
⇒Methods of avoiding Double Taxation /Double Taxation Avoidance Agreement(DTAA)
A double taxation avoidance agreement is an agreement entered into between two countries to avoid taxing the same income twice. Generally, there are two legal criteria under any tax law are residence and source. In line with that when a resident of a country(India) derives income from a source in another country(USA), he is likely to get taxed in both country say source country (USA) and country of residence(India).
The purpose of DTAA is either to avoid double taxation or grant double tax relief for the same income taxed twice. Also, DTAA aims to promote mutual economic relations between the countries.
⇒Most popular Double Taxation Agreement Procedure
Throughout the world, the following double tax exemption methods are widely followed for the avoidance of double taxation or granting double taxation relief.
- Unilateral relief
- Bilateral relief
- Multilateral relief
- Non tax treaties