Double Taxation Relief - Sections 90, 90A, and 91 of the Income Tax Act

In today's interconnected global economy, individuals and businesses often earn income from multiple countries, leading to potential tax liabilities in both the source country and the country of residence. This situation, known as double taxation, can significantly impact financial outcomes and hinder international economic activities. To address this challenge, India has implemented Double Taxation Avoidance Agreements (DTAA) with over 94 countries, supported by the provisions of Sections 90, 90A, and 91 of the Income Tax Act of 1961. These provisions are designed to prevent the same income from being taxed twice and to provide taxpayers with the necessary relief, thereby fostering smoother international business operations and financial transactions. Need help with your ITR filing? Let IndiaFilings experts guide you through the process.

What is the Double Taxation Avoidance Agreement (DTAA)?

Income is typically earned in the country where services are rendered or income-generating assets are located, known as the source country. However, individuals and businesses often reside or are based in a different country, referred to as the country of residence. Due to domestic tax laws, income earned in one country is often taxable in that country as well as in the country of residence. This can lead to the same income being taxed twice—once in the source country and again in the country of residence. To mitigate this double taxation issue, countries enter into Double Taxation Avoidance Agreements (DTAA), also known as tax treaties. These agreements are crucial for businesses and individuals who earn income in multiple countries, ensuring they do not pay taxes twice on the same income. For instance, an Indian company like ABC Limited operating in Singapore would normally have to pay taxes in Singapore on the income earned there and again in India on its global income. However, with a tax treaty like the India-Singapore DTAA in place, the company can avail of tax relief under Section 90 of the Income Tax Act. If no such treaty exists, the relief could instead be sought under Section 91.

Types of Double Taxation Relief

To prevent the problem of double taxation—where the same income is taxed by two different jurisdictions—reliefs are provided under international tax law. These reliefs are broadly categorized into two types:

Bilateral Relief

Bilateral relief applies when a Double Taxation Avoidance Agreement (DTAA) exists between India and another country. Under this arrangement, there are two main methods to alleviate double taxation:

Exemption Method: This method allows income that has been taxed in one country to be exempt from tax in the resident country, thus preventing double taxation.
Credit Method: Under this method, the tax paid in one country is credited against the tax payable in the resident country on the same income, effectively reducing the total tax liability to the higher of the two rates.

Unilateral Relief

Unilateral relief comes into play when there is no DTAA between the resident country and the source country. In such cases, the resident country, on its own initiative, may offer relief to its residents. Section 91 of the Income Tax Act of 1961 provides the framework for unilateral relief, where the home country allows a credit for the tax paid in another country on income derived from that country.

Benefits of Relief under Sections 90, 90A, and 91 of the Income Tax Act

The provisions of Sections 90, 90A, and 91 of the Income Tax Act are integral in mitigating the complexities associated with international taxation, particularly double taxation. These sections not only provide tax relief but also enhance economic relations between countries by creating a stable and predictable tax environment. Here are the key benefits derived from these provisions:

Avoidance of Double Taxation

The foremost advantage of sections 90, 90A, and 91 of the Income Tax Act is the prevention of double taxation. This ensures that income earned by individuals or entities in foreign countries is not taxed in the source and country of residence. Such clarity in tax obligations upholds fairness and reduces the financial burden on taxpayers, encouraging them to engage in cross-border economic activities without the fear of excessive taxation.

Promotion of Economic Cooperation

Sections 90, 90A, and 91 significantly contribute to fostering international economic cooperation by delineating clear tax rules and agreements. These legal frameworks simplify cross-border transactions, making it easier for businesses to operate internationally. As a result, they encourage foreign investments and trade, which are pivotal to global economic integration and growth.

Dispute Resolution Mechanism

One of the critical features of the Double Taxation Avoidance Agreements (DTAA) referenced in these sections is the Mutual Agreement Procedure (MAP). MAP provides a formal avenue for resolving tax disputes between countries, offering a way to address issues that may arise concerning the interpretation or application of a DTAA. This mechanism ensures that disputes are settled in a fair and impartial manner, thereby maintaining the integrity of international tax agreements and preventing tax-related conflicts. Overall, the relief provided under Sections 90, 90A, and 91 plays a vital role in international finance and taxation.

Section 90 of the Income Tax Act

Section 90 of the Income Tax Act pertains to cases involving the Double Taxation Avoidance Agreement (DTAA). This provision ensures that individuals working for foreign companies do not face double taxation on their income. Under DTAA, if an individual is employed in a foreign country or an expatriate works in India, both governments agree not to tax the same income simultaneously. The agreement typically includes mechanisms like foreign tax credits or exemptions to ensure taxation occurs only once.

Section 90A

Section 90A extends the principles of Section 90 to scenarios where the DTAA involves specified associations, rather than countries directly. It applies when a particular organization or association in India has established a DTAA with a counterpart in a foreign country. This section allows tax relief through a similar process to Section 90 but is specifically tailored for agreements between institutional bodies.

Relief Under Section 90A

For agreements under Section 90A, tax relief is available as a credit for taxes paid abroad if these exceed the tax liability in India. This provision ensures that entities involved in such DTAAs do not pay more in taxes than they are obligated to under domestic laws.

How to Compute Double Taxation Relief Under Section 90 of Income Tax?

When dealing with incomes from both Indian and foreign sources, it’s essential to understand how to calculate the double taxation relief under Section 90 of the Income Tax Act. Here’s a step-by-step guide to computing this relief:

Compute Total Income: Start by calculating the aggregate of both Indian and foreign income. This total will serve as the basis for further tax calculations.
Tax Calculation on Total Income: Compute the tax on this combined global income as per the provisions of the Income Tax Act. This involves applying the appropriate tax rates to the total income.
Average Tax Rate: Determine the average tax rate by dividing the total tax amount by the total global income. This rate reflects the proportion of tax relative to income, providing a baseline for assessing the tax impact on foreign income specifically.
Calculate Tax on Foreign Income: Apply the average tax rate calculated in the previous step to the foreign income. This calculation gives the hypothetical tax amount that would be payable on the foreign income if it were subjected to Indian tax rates.
Compute Tax Paid in a Foreign Country: Record the actual tax paid in the foreign country on that foreign income. This step is crucial as it will be used to compare against the computed tax on foreign income to determine the relief amount.

The relief for double taxation will be the lower of the tax computed on foreign income (Step 4) and the actual tax paid abroad (Step 5). This ensures that taxpayers do not end up paying more in taxes than they are required to, adhering to fair taxation principles while acknowledging international income sources. Example: Ms. B, residing in India, earned Rs. 1,50,000 in India and Rs. 2,50,000 from Germany. She paid Rs. 15,000 as tax in Germany. Her total tax liability on global income in India is Rs. 10,000. The calculation is as follows:

Step 1:Total income is Rs. 4,00,000 (Rs. 1,50,000 + Rs. 2,50,000)
Step 2:Tax on global income is Rs. 10,000.
Step 3:Average tax rate is 2.5% (10,000 / 4,00,000 * 100).
Step 4:Tax on foreign income as per Indian rates is Rs. 6,250 (2,50,000 * 2.5%).
Step 5:Tax paid in Germany is Rs. 15,000.

The relief she can claim will be Rs. 6,250, the lesser of the tax computed on foreign income as per Indian rates and the tax actually paid in Germany.

Section 91 of the Income Tax Act - Unilateral Relief

Section 91 provides a solution for individuals who earn income from countries where India does not have a DTAA. Despite DTAAs with over 94 countries, Section 91 ensures that relief from double taxation is still available when no such agreement exists. This unilateral relief allows taxpayers to claim a credit for the lower two tax rates paid in the respective countries, providing significant relief in cases of double taxation. This relief is available under specific conditions:

Income Earned: The income must have been earned in the previous financial year.
Tax Liability: The income should be subject to taxation in both India and the foreign country.
Comparable Tax System: The tax system of the foreign country must be comparable to that of India.
Tax Payment: The taxpayer must have paid taxes on this income in the foreign country.
Relief Calculation: The amount of unilateral relief is calculated as the lesser of the tax rates applied by India or the foreign country on the foreign income. This amount is then deducted from the taxpayer's total tax liability in India.

To benefit from either bilateral relief under a DTAA or unilateral relief under Section 91, taxpayers are required to file an Indian income tax return and provide a tax payment or deduction certificate from the relevant foreign tax authority. It's also crucial to follow the guidelines issued by the Central Board of Direct Taxes (CBDT) to ensure the foreign tax credit is properly secured. Need assistance with your income tax return and ensuring compliance with tax laws? Opt for our expert CA-assisted ITR filing services today!

Calculating Double Taxation Relief under Section 91 of the Income Tax Act

Calculate Tax Payable in India: Determine the tax liability on foreign income according to Indian tax rates.
Compare Tax Rates: Identify the lower tax rate between India and the foreign country.
Calculate Relief: Apply the lower tax rate to the doubly taxed income.

Example: Mr Y earned Rs. 3,00,000 from a country with no DTAA with India, with a tax rate of 25% in that country and a 30% tax rate applicable in India. His relief calculation would proceed as follows:

Step 1:Indian tax payable on foreign income is Rs. 90,000 (3,00,000 * 30%).
Step 2: The lower tax rate between the Indian rate (30%) and the foreign rate (25%) is 25%.
Step 3: The relief he can claim is Rs. 75,000 (3,00,000 * 25%).

The relief Mr. Y can claim under Section 91 will be Rs. 75,000, calculated using the lower foreign tax rate. To effectively claim a foreign tax credit and navigate the intricacies of international tax laws, taxpayers must adhere to the regulations set forth in Rule 128 of the Income Tax Rules, 1962. This rule outlines the necessary steps and documentation required for claiming tax relief on income earned abroad, ensuring compliance with both Indian tax laws and international agreements.

Key Requirements for Claiming Foreign Tax Credit

Eligibility and Timing: Residents of India who have paid taxes on foreign income are eligible. The credit must be claimed in the year the income is assessed in India, and can be adjusted over multiple years if the income is assessed progressively.
Scope of Credit: The credit can be applied against tax, surcharge, and cess as per Indian laws but does not cover interest, penalties, or other fees.
Handling Disputed Taxes: Credits for taxes under dispute are not permitted until the dispute is resolved. Taxpayers must submit evidence of the resolved dispute and payment within six months thereafter.
Documentation Requirements: Taxpayers must submit Form No. 67 along with a certificate or statement from the foreign tax authority detailing the nature of the income and tax paid. This must be accompanied by proof of tax payment or deduction.
Filing Deadline: All required documents should be filed on or before the due date for filing the income tax return as specified under Section 139(1) of the Income Tax Act.

Steps to Calculate the Foreign Tax Credit

Segmentation of Income Sources: The Foreign Tax Credit must be computed separately for each source of income. This segmentation ensures that the credit is accurately applied to the tax liabilities associated with specific earnings.

Comparison of Tax Liabilities: The amount of credit to be claimed is the lower of:
- The tax payable on such income under the Indian Income Tax Act, or
- The taxes actually paid in the foreign country.
Currency Conversion for Tax Payments:
- To determine the amount of taxes paid in a foreign country, the foreign currency amount must be converted to Indian Rupees. This conversion should use the Telegraphic Transfer Buying Rate (TTBR) as of the last day of the month immediately preceding the month in which the foreign tax was paid or deducted. This rate provides a standardized approach to handling currency fluctuations and ensures that the tax credit calculation reflects a fair conversion rate.

Penalties for Non-Disclosure of Foreign Income

Navigating tax compliance, particularly concerning foreign income, can be complex, and failure to accurately disclose such earnings can lead to substantial penalties. Here’s a breakdown of the potential penalties that taxpayers might face for various non-compliance issues related to foreign income:

Default in Tax Payment:

If taxes are not paid correctly, the tax authorities will determine the penalty amount, which will not exceed the amount of tax payable. This serves as a deterrent to ensure that all tax liabilities are met on time.

Under-reporting of Income:

In cases where the income declared by the taxpayer is less than what is determined by the tax authorities, a penalty of 50% of the tax payable on the under-reported income is levied. This penalty aims to discourage taxpayers from under-declaring their income to reduce tax liability.

Failure to Maintain Documents and Books of Accounts:

Generally, failing to maintain required documents and books of accounts incurs a penalty of Rs. 25,000. If foreign transactions are involved, the penalty increases to 2% of the value of such international transactions. This ensures that all relevant financial activities are adequately recorded and transparent.

Penalty for Fake Documents:

If tax authorities discover fake invoices or any fraudulent documentary evidence within the taxpayer's records—such as invoices for non-existent goods, services, or transactions from non-existent entities—the penalty will be equivalent to the sum of such false or omitted entries. This penalty is significant and is intended to deter the creation or use of counterfeit documentation to evade taxes.

Penalty for Not Filing an Income Tax Return:

Failing to file an income tax return incurs a penalty of Rs. 5,000. This encourages timely and complete filing of tax returns, which is essential for accurate tax administration and compliance. Click here to learn more about Penalty for Late Filing Income Tax Returns

Conclusion

Navigating the complexities of international taxation requires a thorough understanding of the relief mechanisms available under the Income Tax Act, particularly Sections 90, 90A, and 91. These provisions are crucial for mitigating the risks of double taxation, ensuring fair tax practices, and promoting global economic cooperation. By leveraging DTAAs and understanding how to claim foreign tax credits, taxpayers can significantly reduce their tax burden and avoid the pitfalls of double taxation. Whether you're an individual or a business with foreign income sources, staying informed about these tax relief options is essential for maintaining compliance and optimizing your financial outcomes in a globalized world. Need assistance with your ITR filing? IndiaFilings experts are here to help you with your filing needs. Get Started! Also, read - Can I file ITR for the last 3 years now?