Introduction

The current scenario of cross-border transaction across the world and upsurge in international trade and commerce and increasing interaction among the nations, residents of one country extend their sphere of business operations to other countries where income is earned. One of the most significant results of globalization is the noticeable impact of one countrys domestic tax policies on the economy of another country. This has led to the need for incessantly assessing the tax regimes of various countries and bringing about indispensable reforms.

What is Tax ?
A Tax is a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many administrative division. Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent.

Double Taxation-Introduction

Where a taxpayer is resident in one country but has a source of income situated in another country, it gives rise to possible double taxation.

This arises from two basic rules that enable the country of residence as well as the country where the source of income exists to impose tax, namely, (i) source rule and (ii) the residence rule.

Double Taxation- Introduction

The source rule holds that income is to be taxed in the country in which it originates irrespective of whether the income accrues to a resident or a nonresident whereas the residence rule stipulates that the power to tax should rest with the country in which the taxpayer resides.
If both rules apply simultaneously to a business entity and it were to suffer tax at both ends, the cost of operating in an international scale would become prohibitive and deter the process of globalization

Double Taxation-Introduction

Double taxation is the levying of tax by two or more jurisdictions on the same declared income (in the case of income taxes), asset (in the case of capital taxes), or financial transaction (in the case of sales taxes). Taxation of the same income by two or more countries would constitute a prohibitive burden on the tax-payer.

Concept of -DTAAs

Liability to tax on the income arises in the country of source and the country of residence. The Fiscal Committee of OECD in the Model Double Taxation Convention on Income and Capital, 1977, defines double taxation as the imposition of comparable taxes in two or more states on the same tax payer in respect of the same subject matter and for identical periods

Concept of -DTAAs

Nations are often forced to discuss and settle the claims of other nations by means of double taxation avoidance agreements, in order to bring down the barriers to international trade. Such agreements are known as "Double Tax Avoidance Agreements" (DTAA) also termed as "Tax Treaties.

Double tax treaties are settlements between two countries, which include the elimination of international double taxation, promotion of exchange of goods, persons, services and investment of capital.

Concept of -DTAAs

The two countries have an Agreement for Double Tax Avoidance, in which case the possibilities are:

1. The income is taxed only in one country. 2. The income is exempt in both countries. 3. The income is taxed in both countries, but credit for tax paid in one country is given against tax payable in the other country.

Objectives of DTAAs
1)They help in avoiding and alleviating the adverse burden of international double taxation, by

a) laying down rules for division of revenue between two countries; b)exempting certain incomes from tax in either country; c) reducing the applicable rates of tax on certain incomes taxable in either countries.

Objectives of DTTAs
2) Equally importantly tax treaties help a taxpayer of one country to know with greater certainty the potential limits of his tax liabilities in the other country. 3) benefit from the tax-payers point of view is that, to a substantial extent, a tax treaty provides against non-discrimination of foreign tax payers or the permanent establishments in the source countries vis--vis domestic tax payers.

India and DTAAs

India has comprehensive Double Taxation Avoidance Agreements (DTAA ) with 84 countries. This means that there are agreed rates of tax and jurisdiction on specified types of income arising in a country to a tax resident of another country. Under the Income Tax Act 1961 of India, there are two provisions, Section 90 and Section 91, which provide specific relief to taxpayers to save them from double taxation

Income Tax Act 1961

Section 90 is for taxpayers who have paid the tax to a country with which India has signed DTAA.

While Section 91 provides relief to tax payers who have paid tax to a country with which India has not signed a DTAA.
Thus, India gives relief to both kind of taxpayers

Example of DTAA

A large number of foreign institutional investors who trade on the Indian stock markets operate from Mauritius and the second being Singapore. According to the tax treaty between India and Mauritius, capital gains arising from the sale of shares are taxable in the country of residence of the shareholder and not in the country of residence of the company whose shares have been sold. Therefore, a company resident in Mauritius selling shares of an Indian company will not pay tax in India. Since there is no capital gains tax in Mauritius, the gain will escape tax altogether.

Income Tax Act 1961

Agreement with foreign countries or specified territories Bilateral Relief [Section 90]: (i) Section 90(1) provides that the Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India(a) for granting of relief in respect of (i) income on which income tax has been paid both in India and in that country or specified territory; or (ii) income tax chargeable under this Act and under the corresponding law in force in that country or specified territory to promote mutual economic

Income Tax Act 1961

(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory; or (c ) for the exchange of information for the prevention of evasion or avoidance of income tax chargeable under this Act or under the corresponding law in force in that country or specified territory or investigation of cases of such evasion or avoidance; or (d) for recovery of income tax under this Act and under the corresponding law in force in that country or specified territory.

Income Tax Act 1961

Double taxation relief to be extended to agreements (between specified Associations) adopted by the Central Government [Section 90A]: (i) Section 90A provides that any specified association in India may enter into an agreement with any specified association in specified territory outside India and the Central Government may, by notification in the Official Gazette, make the necessary provisions for adopting and implementing such agreement for (I) grant of double taxable relief, (II) avoidance of double taxation of income, (III) exchange of information for the prevention of evasion or avoidance of income tax (IV) recovery of income tax.

Income Tax Act 1961

Countries with which no agreement existsUnilateral Agreements [Section 91]: In case of income arising to an assessee in countries with which India does not have any double taxation agreement, relief would be granted under Section 91 provided all the conditions are fulfilled: (a) The assessee is a resident in India during the previous year in respect of which the income is taxable. (b) The income arises or accrues to him outside India.

Income Tax Act 1961

(c) The income is not deemed to accrue or arise in India during the previous year. (d) The income has been subjected to income tax in the foreign country in the hands of the assessee. (e) The assessee has paid tax on the income in the foreign country. (f) There is no agreement for relief from double taxation between India and other country where the income has accrued or arisen

In such a case, the assessee shall be entitled to a deduction from the Income tax payable by him. The deduction would be a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax in the said country, whichever is lower, or at the Indian rate of tax if the both rates are equal.