What is Double Taxation & How To Get Double Taxation Relief?

Double taxation is when the income tax is levied twice on your income & it occurs in 2 ways. The first one is juridically and the second is economically. Thus, your income outside India is taxed twice with foreign and domestic taxes.

The concept of Economic Double Taxation refers to the situation where an individual's income, or a portion of it, is taxed twice within the same country by two different entities.

Similarly, if an individual is required to pay taxes on the same income earned outside of their home country in two different jurisdictions, it is called Juridical Double Taxation. In either case, this can place an undue burden on the taxpayer as they are being taxed twice on the same income, which is an uncommon and unfair circumstance.

So in this article, we’ll cover many aspects related to double taxation and some strategies for resolving your tax problems and obtaining relief from Double Taxation whenever possible. Read on!

What is Double Taxation?

Double taxation is a term often used to describe the taxation of both corporations and their shareholders. This happens when a corporation pays taxes on itsgenerated profits. Then the shareholders, including independent investors and corporate executives, pay taxes on the dividends they receive from the corporation's earnings.

Double taxation can also refer to a situation where a business or individual is taxed twice on the same income in two different countries.

Types of Double Taxation

There are two types of Double Taxation:

Domestic Double Taxation

This occurs when a taxpayer is taxed twice by the same government on the same income. For instance, a corporation may be taxed on its profits, and its shareholders may also be taxed on the dividends received from those profits.

International Double Taxation

This happens when the same income is taxed by two or more countries. It occurs when a taxpayer earns income in a foreign country and is also taxed on that income in their home country. It can also arise due to differences in tax laws and regulations between countries.

Double Taxation Relief

Double Taxation can cause a financial burden for taxpayers. Nevertheless, relief can be sought under Sections 90, 90A, and 91 of the Income Tax Act to avoid being taxed twice on your income. You can apply for relief from double taxation in domestic and international situations. The following are the available methods for seeking relief:

• If a DTAA (Double Taxation Avoidance Agreement) is pertaining to the specific association, there is tax relief available under section 90A.
• Relief is available u/s 91 in case India & foreign countries do not have a DTAA.
• Relief is available u/s 90 If India & a foreign country have a DTAA (Double Taxation Avoidance Agreement).

There are 2 ways in which double taxation relief occurs. These are as follows:

• Bilateral Tax Relief: In the cases that two countries have an agreement, this Tax Relief will be calculated in accordance with the terms of the agreement. The following methods may assist you in relief on both sides:
• Tax Relief Method: In this scenario, both countries will levy tax on your income but you will be exempted from the tax in your country of residency.
• Exemption Method: Your income will be liable to the income tax in the case of one nation.
• Unilateral Relief: If a mutual agreement is not reached between your home country and another country, you may qualify for Unilateral Relief for Double Taxation. In this case, your home country will provide the necessary relief to eliminate double taxation.

Double Taxation Relief on Double Taxation Abroad

Tax treaties between countries and legal systems are widely acknowledged as the optimal approach to dealing with international double taxation. These treaties involve collaboration and information sharing between jurisdictions and are intended to eliminate or mitigate unfair taxation, enhance the efficiency of international trade, prevent tax evasion, and ensure tax predictability.

Double Taxation Avoidance Agreements (DTAA):

A Double Taxation Avoidance Agreement (DTAA) is an agreement between two countries that aims to prevent or decrease the occurrence of territorial double taxation on the same income.

The primary objective of DTAs is to reduce double taxation, which can hinder international trade. In today's interconnected world, double taxation is counterproductive and can discourage investment.

DTAs play a crucial role in ensuring that double taxation does not impede global trade and investment.

Double Taxation Avoidance Agreements (DTAAs) play a crucial role in promoting bilateral investment and trade between nations. When two countries are experiencing expanding trade and anticipate future growth, they typically facilitate the signing of a DTAA to eliminate double taxation and facilitate trade.

The DTAA provides guidelines for handling income from cross-border transactions, ensuring that it is not subjected to double taxation. The agreement may specify that the investor's country of residence imposes the tax, while the nation where the income is generated exempts it.

Alternatively, the investor may be taxed where the income is produced and granted a foreign tax credit in their country of residence.

There are several nations with which India has a DTAA agreement. These nations are as follows-

• United States of America
• United Kingdom
• Ukraine
• UAE
• Thailand
• Sweden
• South Africa
• Saudi Arabia
• Italy
• Japan
• China
• Australia

Section 90 of The Income Tax Act

Section 90 of the I-T Act provides relief to taxpayers who face double taxation, and those who are taxed in India and another country or territory outside India.

The provision in Section 90 empowers the Central Government to enter into an agreement with the government of any foreign nation or a specific territory outside India.

The objective of Section 90 is to provide relief in respect of any of the following relevant situations:

• If the taxpayer is a resident of India and has paid taxes in a foreign country with which India has entered into a Double Taxation Avoidance Agreement (DTAA).

• If the taxpayer is a resident of a foreign country with which India has entered into a DTAA and has paid taxes in India.

• If the taxpayer is a resident of India and has income that accrues or arises outside India.

• If the taxpayer is a non-resident of India and has income that accrues or arises in India.

In any of these circumstances, the taxpayer can claim relief from double taxation under Section 90 of the Income Tax Act.

Conclusion

Summing it up, Double Taxation can create a significant tax burden, but you can seek relief from it by utilizing the specific provisions mentioned earlier and the relevant sections of the IT Act. This will significantly reduce your tax liability. We hope that the information provided in this blog will assist you in selecting the appropriate methods to avoid Double Taxation.

Also, Read: "Supreme Court Ruling On Income Tax Searches To Provide Relief To Taxpayers".

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