Published on May 13, 2014
presented TO, R.SRINIVAS FACULTY DOS IN COMMERCE MANASAGANGOTRI MYSORE
Contents Introduction Meaning of double taxation Reliefs for double taxation Unilateral relief Bilateral relief Conclusion References
Introduction of double taxation Before considering the basic principles of international double taxation ,you need to make sure we know what a tax is ? James(1998),in his dictionary of taxation, commonly used definition “A compulsory levy made by public authority for which nothing is received directly in return” This definition suggest that the nature of tax is that it is a payment made(a cost incurred ) without the usual associated receipt , Other transactions, of any consideration in return. The interaction of two tax systems each belonging to different country, can result in double taxation. Double Taxation of the same income in the hands of same entity would give rise to harsh consequences and impair economic development. Concept of Double taxation
Meaning of double taxation Double taxation means taxing the same income twice, once in the home country and again in host country. It is of relevance to mention here “No rules of international law prohibit international double taxation.” So it is for the countries in the international arena to solve double taxation problems. Double taxation of income is a great disincentive as it Hampers free flow of capital and Becomes a prohibitive burden on taxpayers leading to decline in foreign investments.
Rules due to which double taxation arises Source Rule – Under which the income of a person is subjected to taxation in the country where the source of such income exists i.e. where the business establishment is situated or where the assets/property is located irrespective of whether the income earner is a resident in that country or not; and Residence Rule – Under which the income earner is, taxed on the basis of his/her residential status in that country. Hence, if a person is resident of a country, he/she may have to pay tax on any income earned outside that country as well.
HOW TO CALCULATE RELIEF UNDER SECTION 90, WHAT TREATY USE FOR THIS CALCULATION? First include the income earned and taxed in the foreign country along with the income earned in India. Then calculate tax on the Total income Above. Now calculate average rate of tax. Then multiply such rate with the income earned from foreign country. Deduct tax paid in the foreign country from the tax calculated in step. 4 above, . Such amount is relief u/ s 90.
example In case of Resident individual. Income earned in India = Rs500000 Income earned from foreign = 200000 (tax paid there = Rs. 50,000) 1) Total income is = 500000 + 200000 = 700000 2) Tax calculated on 7,00,000/- is Rs. 118450/- 3) average rate of tax is (118450 / 700000) = 16.92% 4) Calculate average tax on foreign income i.e. 200000 x 16.92% = Rs. 33840/- 5) Tax paid in foreign country is Rs. 50,000. 6) Hence relief u/s 90 is lower of 33840 and 50000, i.e 33.840/- Therefore tax statement is, Tax on total income = 118450 Less: relief u/s 90 = 33840 Tax payable 84610/-
Reliefs for double taxation The relief against such double taxation in India has been provided under Section 90and Section 91 of the Income Tax Act. They contain two ways of double taxation relief Unilateral relief Bilateral Relief
Unilateral relief: Under this system of taxation whether the income is subject to tax abroad or not is immaterial. In Unitary system, relief is given by way of tax credit for the taxes paid abroad. The countries, which follow this method of tax credit, are, U.S, Greece, India, and Japan to name a few. For example, under section 91 of the Income tax Act,1961,the method is “tax credit method”. A resident in India who has paid income tax in any country with which India does not have a treaty for the relief or avoidance of double taxation is entitled to credit against his Indian Income tax for an amount equal to the Indian coverage rate or the foreign rate whichever is lower applied to the double taxed income. This is done as follows.
Unilateral relief will be available for the tax-payer, if the following conditions are satisfied:- The person or company (assesses) in question must have been resident in India in the previous year; Same income must have accrued or arisen to him outside India during the previous year and it should also be received outside India. Such income must not be deemed to accrue or arise in India; That income should be taxed both in India and in a foreign country and there should be no reciprocal arrangement for relief or avoidance from double taxation with the country where the income has accrued or arisen. In respect of that income, the person or company (assessee) must have paid by deduction or otherwise, tax under the law in force in the foreign country in question in which the income outside India has arisen. It is necessary that the foreign tax be levied in a country with which India has no agreement for relief against or avoidance of double taxation, but it is immaterial that tax paid in such a foreign country is in respect of income arising in another foreign country with which Indian has such an agreement
Bilateral Relief Under Section 90, Indian government provides protection against double taxation by entering into a mutually agreed tax treaty (DTAA) with another country. Under bilateral relief, protection against double taxation is provided either by completely avoidance of overlapping tax or waiving a certain amount of the tax payable in India. Bilateral relief is provided in section 90 and 90A of the Indian Income Tax Act. Bilateral relief is provided through following methods:
Exemption Method One method of avoiding double taxation is for the residence country to altogether exclude foreign income from its tax base. The country of source is then given exclusive right to tax such incomes. This is known as complete exemption method and is sometimes followed in respect of profits attributable to foreign permanent establishments or income from immovable property. Indian tax treaties with Denmark, Norway and Sweden embody with respect to certain incomes. Credit Method This method reflects the underline concept that the resident remains liable in the country of residence on its global income, however as far the quantum of tax liabilities is concerned credit for tax paid in the source country is given by the residence country against its domestic tax as if the foreign tax were paid to the country of residence itself.
Tax Sparing One of the aims of the Indian Double Taxation Avoidance Agreements is to stimulate foreign investment flows in India from foreign developed countries. One way to achieve this aim is to let the investor to preserve to himself/itself benefits of tax incentives available in India for such investments. This is done through “Tax Sparing”. Here the tax credit is allowed by the country of its residence, not only in respect of taxes actually paid by it in India but also in respect of those taxes India forgoes due to its fiscal incentive provisions under the Indian Income Tax Act.
conclusion Apart from relief to persons of a country where India has entered in Double Taxation Avoidance Agreement, there is relief given even in cases where the Government of India has not entered into DTA agreement with any foreign country. In such cases if any resident Indian produces evidences to show that, he has paid any tax in any country with which the Government of India has not entered into a DTA agreement, tax relief on that part of his income which suffered taxation in the foreign country, to the extent of tax so paid in such foreign country, or the tax leviable in India under the Income Tax Act on such income whichever is less shall be allowed as deduction u/s 91 while calculating his tax liabilities on such income.
References http://www.incometaxindia.gov.in International Tax Policy and Double Tax Treaties --- Kevin Holmes
presented BY prakasha 2nd SEM MFM DOS IN COMMERCE MANASAGANGOTRI MYSORE
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