Double Taxation is a situation in which the same income becomes taxable in the hands of the same company or individuals (tax- payer) in more than one country. It is a situation in which the tax payer pays tax both in the country of residence as well as in the other country from which he earns income. The situation of Double Taxation arises due to different rules for taxation of income in different countries.

In order to reduce the tax burden of an assessee in relation to Double Taxation, Central Government u/s 90 of the Income Tax Act has been certified to enter into Double Tax Avoidance Agreements (DTAA) with other countries. Where an assessee is a residence of one country but has a source of income situated in other country it gives rise to Double Taxation. India has entered into Double Taxation Avoidance Agreements with 79 countries, including U.S.A, Canada, U.K, Japan, Germany, Australia, Singapore, U.A.E and Switzerland etc.

Rules due to which double taxation arises –

a)  Source Rule – Under which the income of a person is subjected to taxation in the country where the source of such income exists i.e. where the business establishment is situated or where the assets/property is located irrespective of whether the income earner is a resident in that country or not; and

b)  Residence Rule – Under which the income earner is, taxed on the basis of his/her residential status in that country. Hence, if a person is resident of a country, he/she may have to pay tax on any income earned outside that country as well.

Main reasons for Double Taxation –

The concept of Double Taxation comes into existence generally due to the following reasons –

1.  A company or a person may be resident of one country but may derive income from other country as well, thus he/ she becomes taxable in both the countries.

2.  A company or a person may be subjected to tax on his/ her world income in two or more countries, which is known as concurrent full liability to tax. One country may tax on the basis of nationality of tax-payer and another on the basis of his/ her residence within its border. Thus, a person domiciled in one country and residing in another may become liable to tax in both the countries in respect of his/ her world income.

3.  A company or a person who is non-resident in both the countries may be subjected to tax in each one of them on income derived from one of them. For example, a non-resident person has a permanent establishment in one country and through it he/ she derive income from the other country.

Conclusion

The Income Tax liability of an assessee in India arises on the basis of residential status of the assessee of the previous year. Thus, if he/she is a resident in India he has to pay tax not only on the income received in India but also on the Income which accrues, arises outside India or received outside India. Thus he/ she become liable to pay double taxes. Thus burden arises on the assessee in respect of huge payment of taxes. Also the trade and services as well as on movement of capital and people across countries are affected due to this.

Thus, the Government has tried to reduce the burden of assessee’s by providing them relief under Double Taxation. 2 types of reliefs has been provided under Double Taxation –

• Unilateral Relief

• Bilateral Relief

A detailed view has been provided in respect of the above mentioned reliefs which are as follows –

a)  Unilateral Relief – Sec 91 of the Income Tax provides relieve to an assessee under unilateral relief. Under this, relief is being provided by the Central Government to an assessee irrespective of whether there is any DTAA (Double Taxation Avoidance Agreement) between India and the other country. No agreement is required b/w both the countries for claiming relief but certain conditions needs to be satisfied which are as under:

• The person or Company has been a resident in India in the previous year.
• The same income should be gained and received by the tax payer outside India in the previous year.
• The person or the Company has paid taxes as per the foreign country Income Tax Rules.
• The income should have been taxed in India and in a country with which India has no tax treaty or agreement.

b)  Bilateral Relief – This relief is being governed by Sec 90 of the Income Tax Act. Under bilateral relief, the Government provides safeguard against double taxation by mutually entering into DTAA with the other country. The assessee’s are being provided relief in respect of tax on the basis of agreement entered by both the countries. This relief is granted on the basis of two methods –

• Exemption method – By which a particular income is taxed in only one of the two countries.

Tax Relief method – Under this, an income is being taxable in both countries in accordance with their respective tax laws read with DTAA. However, the country of residence of the tax payer allows him credit for the tax charged thereon in the country of the source.