Double Taxation Relief (unit 3)
Meaning
Double taxation means the same income is taxed in two different countries. This mostly happens when a
person earns income in one country but is a resident of another. To avoid this, the Income Tax Act
provides relief from double taxation, so that the assessee does not pay tax twice on the same income.
Criteria for Taxing Income under Tax Laws of Any Country
A country may tax income based on two international rules:
1. Residence Rule
Tax is levied based on the residential status of a person. If a person is a resident of a country, that
country can tax his global income, including income earned abroad.
2. Source Rule
Tax is levied based on the source of income. If income is earned or arises in a country, then it is taxable
in that country, even if the person is not a resident.
Types of Double Taxation Relief
There are two types of relief to avoid double taxation in India:
1. Unilateral Relief – Section 91
Given when India does not have a tax agreement (DTAA) with the other country.
2. Bilateral Relief – Section 90
Given when India has signed a Double Tax Avoidance Agreement (DTAA) with the other country.
Conditions for Availing Relief under Section 91 (Unilateral Relief):
1. The assessee is a resident of India.
2. Income is earned outside India.
3. Tax has been paid or deducted in the foreign country.
4. No DTAA exists between India and that foreign country.
How to Compute Unilateral Relief (Section 91):
Step 1: Calculate Total Tax Payable in India
Calculate the Indian tax liability including the foreign income.
Step 2: Compare Indian Tax Rate vs. Foreign Tax Rate
Calculate the effective tax rate in both countries.
Step 3: Multiply the Lower Rate with the Double-Taxed Income
Whichever rate is lower (Indian or Foreign), multiply it with the income that was taxed in both countries.
This amount is the relief available under Section 91.
Example (Section 91):
Foreign income = $100
Tax paid in the foreign country = 15%
Tax rate in India = 30%
Since 15% is lower, relief = 15% of $100 = $15
Hence, assessee can claim a relief of $15 in India.
2. Bilateral Relief – Section 90
If India has a DTAA with another country, then relief is provided based on mutual agreement. Both
residents and non-residents can claim this relief.
Conditions:
1. Assessee is either resident or non-resident.
2. There is a DTAA between India and the other country.
3. The assessee must provide a Tax Residency Certificate (TRC) or similar document.
Methods of Giving Bilateral Relief:
A. Credit Method
The income is taxed in both countries, but the country of residence gives credit for tax paid in the source
country.
Example:
Income earned in USA = $100
Tax paid in USA = $10
Tax payable in India = $12
India will allow credit of $10. The assessee will pay only $2 extra in India.
If USA tax = $15 and India tax = $12,
Then credit is only $12, and the assessee bears extra $3 tax in USA (no refund from India).
B. Exemption Method
The income is taxed in only one country, and the other country exempts that income from tax.
This method is used when the DTAA specifically says only one country can tax that income.
Key Terms in DTAA Application:
1. Permanent Establishment (PE):
If the assessee has a fixed place of business (office, branch, etc.) in both countries, income will be taxed
where the PE is effectively managed.
If PE exists in both countries, then the country where the head office or actual management is located
will tax the income.
2. Center of Vital Interest (Tie-breaker Rule):
If a person has homes in both countries, the country where his personal and economic connections are
closer will decide taxation.
Example:
Person like Sachin Tendulkar has homes in both India and the UK.
If his family, bank accounts, and work are mostly in India, then India will tax him.
Other Legal Provisions:
Section 90(2):
If DTAA exists, the assessee can choose whichever is more beneficial:
1. Provisions of the Income Tax Act, or
2. Provisions of the DTAA
Section 90A:
Covers agreements between India and a specified association (not just countries), like between tax
authorities of India and USA, or India and a foreign trade body.
Important Notes:
Unilateral Relief (Section 91): Only for Indian residents.
Bilateral Relief (Section 90): For both residents and non-residents if DTAA exists.
India has DTAA with over 118 countries. Each DTAA is different, and the method of giving relief may
vary.
