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Double Taxation Avoidance : Tax Treaty and relief under section 90/90a/91 of the Income Tax Act


Double Taxation Avoidance : Tax Treaty and relief under section 90/90a/91 of the Income Tax Act

In today's modern world of advanced globalisation, business is not restricted to a single geographical territory and crosses all borders of the countries. This had emerged a complex world of business along with the complex world of Accounting and Finance.

 

Table of Content

 

The taxation of income can be based on two things: Source of Income basis and

Residential status basis. Therefore, the possibility of double taxation arises.

Resident:

The country has a right to tax the profit earned on its land by anyone and to tax the global income of its residents. This leads to taxation of the same income more than once in different countries. In times when economies are going global, and borders are fading, double taxation is one of the significant obstacles to the development of inter-country economic relations.


Types of Relief under Sections 90 and 91

To prevent this hardship and to avoid the double taxation of the same income, relief under section 90/90a/91 is provided to the taxpayer in the following manner.


  • Bilateral Relief through DTAA (Sections 90 and 90A):

Double Taxation Avoidance Agreements Harmony: Sections 90 and 90A empower the Central Government to forge DTAA with other countries, laying the foundation for harmonious tax cooperation.


Exemption Method: A particular Income is taxed in only one of the two countries.


Tax Credit Method: Income is taxable in both countries in accordance with their respective tax laws read with double taxation avoidance agreement. However, the country of residence of the taxpayer allows him credit for the tax charged thereon in the country of source.


  • Unilateral Relief:

When there is no agreement between the two countries, the county of the residence itself provides relief.

What are the Relief u/s Sections 90 and 90A?

Under Sections 90 and 90A, relief applies exclusively to Indian residents, provided that India has established a Double Taxation Avoidance Agreement (DTAA) with the foreign country or a specified association where the taxpayer has earned income. If a DTAA exists with the concerned country, taxpayers can seek relief under Section 90, while relief under Section 90A can be claimed if the agreement is with specified associations.


These DTAA arrangements allow the Indian government to negotiate various terms with foreign governments, encompassing:


Relief for Taxed Income: Providing relief concerning income already taxed under the Income Tax Act and the tax laws of the foreign country.


Avoidance of Double Taxation: Preventing the occurrence of double taxation on the same income under the tax laws of both India and the foreign country.


Exchange of Information: Facilitating the exchange of information and data between countries to prevent tax evasion, investigate potential tax avoidance, and aid in the recovery of income tax.


In cases where a bilateral agreement has been established, taxpayers hold the flexibility to choose the taxation method that is more beneficial to them—whether under the terms of the DTAA or the standard provisions of the Income Tax Act.


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