Meaning of Double Taxation
Double Taxation means taxing the same income twice in the hands of a person. In other words, when the income earned by a person is taxable in more than one country, then it is called double Taxation of Income.
Rules of Taxation
Any country can levy taxes on income based on two standards-
- Residence Rule
- Source Rule
Residence Rule:
As per residence rule, total income ( including income from a foreign country) of a person is taxable in the country of which he/she/it is resident.
Source Rule:
This rule says that income is to be taxable in the country from which it is earned. In other words, when a person earns income from a country of which he is not a resident, then such income is taxable in that country.
So when a person is a resident of one country but earns income from other countries also then it gives rise to the possibility of double Taxation.
Meaning of DTAAs/Treaties
DTAAs are agreements entered into by the government of one country with the government of another country to-
- provide relief from double taxation of income
- facilitate the exchange of information with each other for the prevention of evasion of income tax
- co-operate with each other for the recovery of taxes.
How Relief is provided by DTAAs
DTAAs provide Bilateral relief.
This relief may be provided by two methods-
- Exemption Method
- Tax Credit Method
Exemption Method:
Under this method, it is mutually decided between the contracting countries through an agreement that income is taxable in which country. In other words, income is taxed in one country and exempted in other.
Tax Credit Method:
Under this method, income is taxable in both countries, but tax paid in the source country is allowed as a credit by the resident country.
Concept of Treaty Shopping
Benefits of provisions of DTAAs can be claimed only when the person claiming such benefits is a resident of one of the contracting countries to the agreement.
However, in many cases, a person who was not a resident of any contracting country also resorted to claiming the benefits. This practice is called treaty shopping.
To prevent treaty shopping, different countries adopt different measures. One such measure is the `Limitation of benefits clause.` India USA DTAA includes the LOB clause.
INDIA AND DTAA
In the present scenario, many countries have DTAAs with each other. For example, India has entered into such agreements with more than 80 countries at present, including the USA, Austria, Australia, etc.
In India, any provisions of the Income Tax act 1961 and DTAAs, whichever is more beneficial, are applicable.
Section 90A of the Income Tax act 1961 provides that DTAAs may also be entered into with any specified association of India with any other association of another country. In other words, it is not necessary to enter DTAA with the whole country. It can be entered into an association situated in another country. The remaining provisions of DTAA are also applicable to DTAA with such associations.
Relief can also be provided even if there is no DTAA. These are called Unilateral reliefs.
Meaning of Terms used in DTAA:
Terms Used in Agreements not defined in it but defined in the notification issued by the government then terms as defined in the notification are taken as terms used in the agreement.
Terms Used in Agreements defined in the agreement itself, then the same meaning is to be taken.
Terms Used in Agreements but defined in the Income Tax Act, then meaning defined in IT Act should be taken.
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