India has comprehensive Double Taxation Avoidance Agreements (DTAA) with 79 countries. This means that there are agreed rates of tax and jurisdiction on specified types of income arising in a country to a tax resident of another country.

• Double Taxation

Double taxation is the levying of tax by two or more jurisdictions on the same declared income, asset or financial transaction. It refers to a situation where the same income becomes taxable in the hands of the same company or individual (tax-payer) in more than one country.

Double Tax Avoidance Agreement

• The Double Tax Avoidance Agreements (DTAA) is essentially bilateral agreements entered into between two countries. In our case, agreement is between India and another foreign state. It is also termed as “Tax Treaties”.
• The basic objective is to avoid, taxation of income in both the countries and to promote economic trade and investment between the two countries.

• Conflict between Double Taxation Avoidance Agreement & The Income Tax Act, 1961

Section 90(2) of the Income Tax Act, 1961 cleared that in case of any conflict between the provisions of above two, the provision of DTAA would prevail over the provisions of the Act.

Hence, it is cleared that where there is conflict between the provisions of Income Tax Act & the provisions as contained in the tax treaty, a tax payer can take advantage of those provisions which are more beneficial to them.

• Applicability of  Treaty benefits
  In order to get the benefit of a tax treaty, it is necessary that a person must qualify in terms of the treaty as a:
  – person
  – resident of any of the Contracting states; and
  – beneficial owner of the income by the way of dividends, interest or royalties for a lower rate of withholding tax.

• Double Taxation Relief                                                                                   Under the Income Tax Act 1961 of India, there are two provisions, Section 90 and Section 91, which provide specific relief to taxpayers to save them from double taxation.
• Section 90 is for taxpayers who have paid the tax to a country with which India has signed DTAA, while Section 91 provides relief to tax payers who have paid tax to a country with which India has not signed a DTAA. Thus, India gives relief to both kinds of taxpayers.

Section 90 – Agreement with Foreign Countries or Specified Territories

(1) The Central Government may enter into an agreement with the Government of any foreign country or specified territory outside India for any of the following purposes:

(a) for the granting of relief in respect of

(i)  income on which have been paid both income tax under the Income Tax Act and income- tax in that country or specified territory, as the case may be, or

(ii) income tax chargeable under the Income Tax 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 investment, or

 

(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be.

 

(c) for exchange of information for the prevention of evasion or avoidance of income tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or

 

(d)       for mutual recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be.

                                                                                                                                                           Further, as per section 90(2), the provisions of agreement will apply if they are beneficial to the assessee. If the Income Tax Act is more beneficial to the assessee, then the Income Tax Act shall apply.

NOTE:  For the above section, specified territory means any area outside India which may be notified as such by the Central Government.

 

• Effect of DTAA

The effect of DTAA is such that,

(i)  Income is taxed in only one country or

(ii) If income is being taxed in both the countries, then the tax paid in one country is allowed as deduction from the tax payable in the other country, as per the agreement.

For Example:

If as per the DTAA with a foreign country or specified territory; the royalty is to be taxed @ 35% then it will be beneficial to apply section 115A (i.e. Tax on Interest, Royalty, Technical Services Fee etc. in case of Non Residents & Foreign Companies) of the Income Tax Act where royalty is taxed @ 20%.

For Example:

If as per the DTAA with a foreign country or specified territory, the royalty is to be taxed @ 10%, then it will be beneficial to apply DTAA instead of section 115A of Income Tax Act.

Hence this lead to the conclusion that, if provisions of Income Tax Act are more beneficial to the assessee than DTAA, then the provisions of Income-Tax Act are applicable and if the  provisions of DTAA are beneficial, then DTAA will get applied.

• Tax Relief in India where there is no DTAA

Section 91 of Income Tax Act, 1961 provides for the grant of unilateral relief in the case of resident tax payers on income where there is no DTAA. The following requirements have to be satisfied in order to claim deduction on the double taxed income:

a)      The assessee must have been resident in India in the relevant previous year,

b)      The income must have accrued or arisen (not deemed to accrue or arise) to him outside India during that previous year, and

c)      In respect of income, he must have paid by deduction.

The assessee is entitled to deduction on such doubly taxed income at the Indian rate of tax or tax of that country, whichever is lower or at the Indian rate of tax, if both the rates are equal.