Since ancient times paying taxes by the common people to the Government has been a mandatory duty. Imposing taxes on various goods and services utilized by the human race is a significant way of generating revenue for the Government. Taxes are imposed on income, sales, and services utilized by individuals. Under certain circumstances, the income or assets of the individual are taxed twice, known as Double Taxation even if there is a single income source.
Double Taxation means that the tax is imposed twice on a particular profit or asset generated through a single source. The tax charged on the profit is either based on different districts/jurisdictions or economic events.
Jurisdiction Double Taxation: Tax is imposed on the asset/profit of an individual who potentially earns money in a foreign country. The taxpayer is taxed twice, first in his earning country and second in his residential country.
Economic Double Taxation: This form of taxation is imposed on a single profit by an individual within the same country by two different individuals.
Tax is imposed twice on individuals residing and earning abroad, individuals residing abroad with income sources from India, or companies/businesses with different branches located in different countries of the world are all liable for Double Taxation in India. Individuals are accountable for getting relief from double taxation in India through the Double Taxation Avoidance Agreement (DTAA), under sections 90, 90A, and 91 of the Income Tax Act. The end-term benefits of double taxation include Foreign Direct Investment and the promotion of International Trade in India.
Paying taxes twice on the profit an individual is making is a stressful deal, that must be resolved by taking appropriate steps for double taxation avoidance.
One major effective way to avoid judicial double taxation is by adhering to the Double Tax Avoidance Agreement (DTAA). India has signed this agreement with 80 other countries. According to this treaty, the individuals (NRIs) are offered a rebate in the total tax the individual needs to pay in both countries. Other specific agreements are signed among the countries to focus on different income sources and the amount of tax exempted from them. In some cases, per this treaty, the individual is not subjected to pay taxes in both countries. The main aim of this treaty includes the prevention of double taxation and the allocation of tax-paying rights to the individual.
Section 90 of the Income Tax Act
Section 90 of the Income Tax Act under the Double Tax Avoidance Agreement (DTAA) states that no individual is subject to paying income tax twice while working for a foreign company.
Section 90A of the Income Tax Act
Section 90A of the Income Tax Act states that a formal agreement/treaty must be signed between two different countries for tax exemption.
Section 91 of the Income Tax Act
Under Section 91 of the Income Tax Act, an individual has been given the right to claim tax relief if the DTAA treaty is not signed by the two countries.
In corporate establishments, one productive way of avoiding double taxation is by facilitating the distribution of salaries and bonuses to the employees from the profit share rather than dividends as salaries or bonuses are taxable for employees but are deductible expenses for the business.
Business owners could be exempted from Double taxation by categorizing the profit share of the company for both the personal expenses of the owners and for further investment in the business itself. Levying of taxes on a single business twice feels like a penalty that is hard to contemplate.
Another effective way of double taxation avoidance is the Exemption method, comprised of the provision according to which if an income/profit is being taxed in a country is liable to be exempted from any sort of tax from other countries. Tax exemption could be in the form of full exemption or exemption with progression.
The Tax Credit Method involves another provision of double taxation avoidance that includes Tax paid in one country being credited against the tax payable in the other country.