The government has mandated that from April 1, 2013, all foreign investors desirous of claiming benefits under the double taxation avoidance agreements (DTAAs) will have to produce tax residency certificates (TRC) of their base country in which they are located.
According to a notification issued by the Central Board of Direct Taxes on September 17, 2012, the amendments to the Income Tax Act, 1961, will take effect from April 1, 2013, and apply in relation to assessment year 2013-14 and subsequent years. The notification, in effect, amends Section 90 and Section 90A of the I-T Act dealing with taxation of foreign investment and tax benefits under DTAAs. Till date, India has inked DTAAs with 84 countries. Under Section 90 (4) of the Act, as inserted by the Finance Act, 2013, with effect from April 1, 2012, it is provided that an assessee, not being a resident, to whom an agreement referred to in sub-section (1) of Section 90 applies, shall not be entitled to claim any relief under a DTAA unless a certificate, containing such particulars as may be prescribed, of his being a resident in any country or specified territory outside India is obtained by him from the government of that country or specified territory.
A similar provision has been inserted in sub-Section (4) of Section 90A of the Act and pursuant thereto, the CBDT notification seeks to insert Rule 21BA and Forms 10FA and 10FB specifying the manner in which the TRC should be obtained.
Accordingly, the TRC to be obtained by an assessee for availing himself of tax benefits shall contain the name of the assessee along with status — whether it is an individual or a company — the nationality (in case of individual) and the country wherein the company or firm is registered or incorporated. This apart, the TRC should have the tax identification number (TIN) of the assessee, its residential status for the purposes of tax, the period for which the TRC is applicable and the address of the assessee for that period. Also, the certificate shall be duly verified by the government of the country or the specified territory of which the assessee claims to be a resident for the purposes of tax. A clause in the various DTAAs that India has entered into, the assessee can take the advantage of paying capital gains tax in either of the two nations, wherever the rate of the levy is lower. Thus, the interplay of treaty and domestic legislation ensures that a taxpayer, who is resident of one of the contracting countries to the treaty, is entitled to claim applicability of beneficial provisions either of treaty or of the domestic law.
In this blog post, Sayandeep Pahari, a student pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes how reliefs are calculated under DTAA.
In this era of globalization, an international or cross-border transaction has become an indispensable component of our economy. Taxation policies are modified, subject to the tax regimes of other countries. The domestic tax policies of one country affect its transaction with other countries, which has led to the reviewing of taxation system periodically in order to suit the contemporary needs. There are two principles, which govern the fiscal jurisdiction of taxation between two sovereign states. One is called the source rule and the other residence rule. Source rule holds that income should be taxed in the place of origin irrespective of the residential status of an individual whereas; the residence rule assesses an individual based on their residence. Therefore, a business based on two countries; will fall under the conflict of these two separate rules and suffer taxes at both ends. If States decide to tax income on such unilateral basis, without any agreement with the other State, it will create an obstruction to trade and hinder globalization. In India, liability under Income Tax Act arises on the basis of the residential status of the assessee during the previous year.
Double taxation means taxing the same income twice, which happens when the same item of an individual’s income is treated as accruing, arising or received in more than one country. DTAA or Double Taxation Avoidance Agreement is a treaty, which helps to overcome such perplexity by enacting rules of taxation between Source and Residential country. It is a universally accepted principle that no income should be taxed twice. Income Tax Act, 1961 serves to such principle by providing relief against double taxation under section 90 and section 91.
Types of Relief
There are two ways by which relief can be provided:
- Bilateral relief – When the Governments of two countries enter into an agreement 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.
Agreements in this kind of relief can be of two types:
When two countries agree that income arising from specified sources, which are taxable in both the countries, should either be taxed in only one of them or that each of the two countries should tax only a particular specified portion of the income so that there is no overlapping.
Tax Credit Method
In this kind of agreement, single taxability is not provided but some relief is provided. The assessee is given a deduction though he is liable to have his income taxed in both the countries.
Section 90 Of Income-Tax Act, 1961 states:
(1) The Central Government may enter into an agreement with the Government of any country outside India—
(a) for the granting of relief in respect of—
(I) income on which have been paid both income-tax under this Act and income-tax in that country; or
(ii) income-tax chargeable under this Act and under the corresponding law in force in that country to promote mutual economic relations, trade and investment, or]
(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or
(c) for 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 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, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.
(2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.]
(3) Any term used but not defined in this Act or in the agreement referred to in subsection (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.
Section 90A Of Income –Tax, 1961 Act states, Adoption by Central Government of agreement between specified associations for double taxation relief.
- Unilateral relief – The relief provided by home country irrespective of any agreement with the country concerned. This kind of relief exists because bilateral agreements might not be sufficient to meet all the cases. In India, Section 91 of the Income Tax Act, 1961 provides such relief. In other words, where Section 90 does not apply for relief under Section 91 will be available. Unilateral relief is only available in respect to doubly taxed income that is part of income which is included in assessee’s total income.
Section 91 of Income Tax Act ,1961 states:
(1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.
(2) If any person who is resident in India in any previous year proves that in respect of his income which accrued or arose to him during that previous year in Pakistan he has paid in that country, by deduction or otherwise, tax payable to the Government under any law for the time being in force in that country relating to taxation of agricultural income, he shall be entitled to a deduction from the Indian income-tax payable by him—
(a) Of the amount of the tax paid in Pakistan under any law aforesaid on such income which is liable to tax under this Act also; or
(b) Of a sum calculated on that income at the Indian rate of tax;
Whichever is less.
(3) If any non-resident person is assessed on his share in the income of a registered firm assessed as resident in India in any previous year and such share includes any income accruing or arising outside India during that previous year (and which is not deemed to accrue or arise in India) in a country with which there is no agreement under section 90 for the relief or avoidance of double taxation and he proves that he has paid income-tax by deduction or otherwise under the law in force in that country in respect of the income so included he shall be entitled to a deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income so included at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.
Calculation of Relief from Double Taxation
The process which is generally adopted by the authorities in order to grant bilateral relief under Section 90 and 90A is:
Step 1 – Compute the total income of person liable to tax in India in accordance with the provision of the Income-tax Act.
Step 2– Allow relief as per the terms of the tax treaty entered into with the other contracting country or specified territory , as the case may be , where the income has suffered double taxation.
Under Section 91 of Income Tax Act, 1961 the steps for calculating relief are:
Step 1 – Calculate tax on total income inclusive of the foreign income on which relief is available. Claim any relief allowable under the provision of this act including rebates available under section 88E but before relief due under sections 90, 90A and 91.
Step 2 – Add surcharge if applicable + education cess + SHEC after claiming the rebate.
Step 3– Calculate the average rate of tax by dividing the tax computed under Step 2 with the total income (inclusive of such foreign income).
Step 4-Calculate the average rate of tax of the foreign country by dividing income tax actually paid in the said country after deducting all relief due. This should be done before deduction of any relief due in the said country in respect of double taxation by the whole amount of the income as assessed in the said country.
Step 5– Claim the relief from the tax payable in India at the rate calculated at Step 3 or Step 4, whichever is less.
The double taxation system is propitious for enhancing the business environment in a country. A treaty of double taxation provides against non-discrimination of foreign taxpayers as well as benefits the taxpayer of a country to know about his liabilities with a greater certainty. One of the recent highlights includes the bilateral agreement between India and Mauritius. Previously, only Mauritius had the right to tax on capital gains by companies investing in India. Tax on capital gains was nearly zero in Mauritius which made the country a sweet spot for individuals investing in Indian companies. After the amendment to the treaty, India gets the right to tax on capital gains from transfer of shares of Indian resident companies.