Double taxation means the same income getting taxed twice in hands of same assessee. Any country taxes income on basis of two rules
- Resident Rule
- Source Rule
Double taxation is possible when assessee is resident of one country and derives income from another country.
Example: Mr Pratysh resident of India and deriving income from UK, then India will tax such income on the basis Resident rule and UK will tax such income on the basis source rule.
Types of Double Taxation
There are two types of Double taxation relief
Unilateral Relief
In certain cases, where there is no double taxation avoidance agreement, between the Country of source and Country of residence, the country of residence of the taxpayer, may provide tax relief under its domestic tax laws. Such a relief is known as Unilateral Relief.
Bilateral Relief
In case of bilateral relief, Governments of two countries , enter into an agreement to provide relief against Double Taxation , on mutually agreed basis.
Such a relief can be provided under either , or both of following methods :
A. Exemption method of Bilateral Relief
Under this method, one of the two countries where Tax is payable, exempts such income from tax. The other country, has the rights to tax such income.
B. Tax credit method of Bilateral Relief
Under this method, income is taxed in both the countries as under : –
- If the income is not liable to tax in the country of source, the question of double taxation would not arise. If the income is taxable in the country of source, tax would have been paid therein , as per the domestic laws of that country or DTAA, whichever is more beneficial to the taxpayer ;
- The country of residence, computes the tax payable on such foreign soured income under its domestic law . Such tax is computed provided the country of residence has the right to tax such income under DTAA (where it exists) or under its domestic laws (where no DTAA exists). If the country of residence, is covered under the exemption method, no tax would be levied, on such foreign source income. in such a case, generally no credit is provided for tax paid in the country of source, against any other tax which may be payable by such taxpayer in the country of residence.
- However, if the country of residence, is covered under the credit method of exemption, then, from the tax payable in the country of residence, tax paid in the country where the income arises, is reduced. After such reduction, if any tax remains payable, the taxpayer pays that amount to the country of residence.
- However, if the tax paid in the country where the income arises is more than the tax payable in the country of Residence, no Tax is payable by the taxpayer to the country of residence .
Section 90: Double Taxation Agreement with foreign countries
Central Government, may enter into agreement with Govt of foreign country or specified territory outside India. In this agreement describes the the following
- For granting relief for Doubly taxed income, without creating opportunities for non- taxation or reduced taxation through tax evasion or avoidance including through treaty-shopping arrangements aimed at obtaining reliefs provided in the said agreement for the indirect benefit to residents of any other country or territory.
- Exchange of information with each other for prevention of tax evasion transaction, investigation of such cases and co-operation with each other for recovery of taxes.
