Double Taxation: Definition, Types and Tips To Avoid It

Taxation is a crucial source of revenue for the government. However, in some cases, your profit or income can be taxed twice. Double taxation implies a situation in which your tax liability increases significantly due to tax imposition at different levels, although the income originates from a single source. 

The following sections will provide a detailed guide on double taxation and double taxation relief. 

Types of Double Taxation

Double taxation is classified into two categories. These are stated below: 

• Economic double taxation

Economic double taxation takes place when an income or a part of it is taxed twice within the same country and at the hands of different individuals. 

• Juridical double taxation

Juridical double taxation refers to a situation wherein an income that is earned outside of India is taxed twice in the hands of an individual. Here, the taxation takes place once in the country of origin and once again abroad.  

Also Read: Income Tax Return Filing: Due Dates And Penalties

About Double Taxation Relief

Double taxation exerts undue financial stress on tax paying individuals. However, to eliminate double taxation on your income, you can ask for relief under Section 90, Section 90A and Section 91 of the Income Tax Act. 

You can ask for double taxation relief both within the country and in a foreign country. You may claim the relief in the following ways: 

• Relief under Section 90 if there exists a DTAA (Double Taxation Avoidance Agreement) between India and a foreign country
• Tax relief under Section 90A if there is a DTAA with a specified association
• Relief under Section 91 if there exists no DTAA between India and a foreign nation

Double taxation relief takes place in two ways: 

• Bilateral relief

In case an agreement exists between two nations, then such tax relief is calculated as per regulations and provisions of the mutual agreement. You can get bilateral relief in any of the following ways: 

1. Exemption method: Here, your income will be liable for taxation in one country only
2. Tax relief method: Here, your income will be liable for taxation in both countries. However, you will receive tax relief from your country of residence. 

• Unilateral relief

You are eligible to receive this type of double taxation relief in case there is no mutual agreement between your home country and another nation. Your home country will provide double taxation relief in such cases. 

Section 90: What is it? 

According to Section 90 of the IT Act, the Government of India will forge an agreement with the government of another country to — 

• Grant relief for income that faces taxation both in India and in a particular country
• Avoid double taxation of income 
• Facilitate the exchange of information to eliminate income tax that is chargeable as per the provisions of the IT Act or corresponding laws of a particular foreign nation
• Recover income tax under the IT Act of India and as per provisions of the law in a particular foreign country

Measures to Avoid Double Taxation

There is little scope for you to avoid double taxation completely. However, as mentioned, there are certain provisions that let you receive relief on double taxation. The provisions, regulations, and other aspects of double taxation relief lie in DTAA (Double Taxation Avoidance Agreement).

Let’s take a detailed look at DTAA. 

DTAA is a tax treaty or a tax agreement that India enters into with another nation. You can avoid double taxation with the help of the provisions of these agreements. A DTAA can be specific in nature, meant for certain categories of income. Alternatively, it can be comprehensive in nature, covering various types of income.  

Also Read: How To Calculate Income Tax In Excel?

How does Relief from Double Taxation Work? 

To help you understand how double taxation relief works, let’s take an example: 

Mr. Sharma is an Indian living in the UK who makes a regular income from investments in India. This income will be taxable both in the UK and in India. However, with DTAA in force between these nations, he can seek tax relief. 

It can take place in two ways depending on provisions of DTAA between India and the UK. If the agreement states that his entire income will be exempt from taxation in the UK, then he would pay taxes in India only. Here, only one nation will charge the taxes. 

However, in case this DTAA states that he has to pay taxes in both nations, he will be eligible for a tax credit in India. So, he would have to pay taxes in both countries, but at a reduced rate.

Final Word

With the help of provisions of DTAAs and specific sections of the IT Act (Section 90, Section 90A or Section 91), you can get double taxation relief. This will help you to reduce your tax liability significantly. 

Frequently Asked Questions

1. How do I claim double taxation relief in India?

You can claim double taxation relief in India in the form of either tax credit or exemptions, as mentioned in the provisions of the DTAA. If there exists no DTAA between India and another nation, then you may get a tax credit for taxes you pay abroad under provisions of Section 91. 

2. Which countries have double taxation treaties with India?

India has signed DTAA with a host of nations that have a sizeable population of Indian origin individuals. There are 88 nations with which India currently has a DTAA, of which 86 are already in force. These countries include the UK, Mauritius, New Zealand, Canada, Singapore, South Africa, UAE, Russia and others.

3. Who is exempted from double taxation?

If you pay taxes on the same profit or income in a foreign country and your country of origin, then you are eligible for double taxation relief. This relief can take place in the form of bilateral relief (if DTAA between your country of origin and a foreign country exists) or unilateral relief (when there is no DTAA between your country of origin and a foreign country). 

4. If my income is taxed in India as well as abroad, can I claim any sort of relief on account of double taxation?

Yes, if you are a non-resident Indian and your income is taxed in India and abroad, you are eligible for double taxation relief. You can claim a tax benefit in India under Section 90 (in case a DTAA exists between the two nations) or Section 91 (if no DTAA exists). 

5. How can NRIs Claim Benefits under DTAA? 

If you are an NRI living in any of the nations that have DTAA with India, you can get double taxation benefits every fiscal year by providing the following documents: 

• Tax residency certificate
• PAN details
• Form 10F

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