Double Taxation Avoidance

Double taxation happens when an individual is required to pay more than two taxes for the same income, asset, or financial transaction in different countries. Double taxation happens primarily because of overlapping tax laws and regulations of the countries where an individual functions his business.
It can also be referred as taxation on same income, asset or transaction by two or more countries. For example income paid to a resident of one country by an entity of a different country.

 

Double Taxation Avoidance Agreement Signed By India
With 79 countries India has worldwide Double Taxation Avoidance Agreement (DTAA). What it means is that there are agreed rate of tax and jurisdiction on specified types of income arising in a country to a tax resident of another country.

Under Income Tax Act 1961 of India, there are two provisions -section 90 and section 91 - which provides specific relief to tax payers to save them from DTAA.

Section 90 is for tax payer 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 DTAA.

Thus , both kind of taxpayers get relief in India.According to the tax treaty in India , Capital Gains rising up from the sale of shares is taxable in the country of residence of the shareholder and not in the country of residence of the Company whose shares have been sold.

 

When an Indian businessman makes a profit or some other type of taxable gain in another country, he may be in a situation where he will be required to pay a tax on that income in India, as well as in the country in which the income was made! To protect Indian tax payers from this unfair practice, the Indian government has entered into tax treaties, known as Double Taxation Avoidance Agreement (DTAA) with 65 countries, including U.S.A, Canada, U.K, Japan, Germany, Australia, Singapore, U.A.E, and Switzerland. DTAA ensures that India's trade and services with other countries, as well the movement of capital are not adversely affected.Ahuja & Ahuja with the help of experts helps in planning, to avoid double taxation and provide them an environment in which they can work freely without the fear of paying double tax.

 

Under Section 90 and 91 of the Income Tax Act, relief against double taxation is provided in two ways:

 

Unilateral Relief

Under Section 91, an individual can be relieved from double taxation by Indian Government irrespective of whether there is a DTAA between India and the other country concerned.
  • Unilateral relief to a tax payer may be offered if:
  • The person or company has been a resident of India in the previous year.
  • In India and in another country with which there is no tax treaty, the income should have been taxed.
  • The tax have been paid by the person or company under the laws of the foreign country in question.

Bilateral Relief

Under Section 90, the Indian government offers protection against double taxation by entering into a DTAA with another country, based on mutually acceptable terms.

 

Such relief may be offered under two methods:

Exemption method This ensures complete avoidance of tax overlapping.
Tax credit method This provides relief by giving the tax payer a deduction from the tax payable in India.