Date: 4 January, 2021
As per the system of double taxation, the income is subject to tax two times. It may be either of the two ways - economic or juridical. In the case of Economic double taxation income or a part of it is taxed twice in the same country, in the hands of two entities. On the other hand, in the case of juridical double taxation, income earned abroad is taxed twice in the hands of the same person, once abroad and once in their home country. This state lays an extra burden on the taxpayer when their income is taxed twice.
RELIEF FROM DOUBLE TAXATION
To mitigate the double taxation of income the provisions of double taxation relief have been created. The double taxation relief can be reached in two ways, the first one being unilateral relief and the second one is bilateral relief. Unilateral relief is relief from double taxation for property in states other than the UK and the USA. It can only apply where there is no Double Taxation Treaty in place between countries. Under Bilateral relief, Governments of the two countries agree to provide relief against double taxation by jointly working out the system to grant it. In India, bilateral relief is provided under Section 90 and 90A of the Income-tax Act, 1961.
SECTION 90 AND 91 OF THE INCOME TAX ACT
If a person who is resident in India in any previous year, in respect of his income, accrued outside India has paid tax on such income in any country outside India, he shall be entitled deduction from the Income Tax payable by him of a sum calculated on such doubly taxed income:
Under section 90 if the country in which tax is paid has entered double taxation avoidance agreement with the Government of India. Under section 91 if the country in which tax is paid has not entered into any agreement with the Government of India. If any non-resident intends to claim relief related to this provision of double taxation, then they require a Tax Residence Certificate (TRC) from the government of that particular country.
DOUBLE TAXATION RELIEF
Relief from double taxation can be provided by methods i.e exemption method and tax credit method. Following the exemption method, specific income is taxed in one of the two countries and exempted in another country. Following the tax credit method, the income is taxed together with the nations stated in the income tax agreement, in addition to the country of residence. This will approve the tax credit or deduction for the tax charged in the country of residence.
BENEFITS OF DTAA TO NRI'S
Many NRIs earn various types of income from India like rental income, interest on FD or NRE/NRO savings account or even capital gain on sale of an asset, etc. However, due to DTAA (Double taxation avoidance act), An NRI can save himself from getting taxed twice in case it is being taxable in their country of residence.
POWER TO CHOOSE
In case if Bilateral Agreement has been signed by referring to Section 90 with a foreign nation, then the concerned party has a choice either to be taxed according to the Double Taxation Avoidance Agreement or according to the normal provisions of Income Tax Act 1961, whichever is more favourable to the concerned party.