Improved connectivity, new technological developments, and the economic policies adopted by governments have led the world to become one global market.
In this era of globalization, it is widespread to see people having economic transactions in various geographical regions leading to tax implications in the respective countries.
And it is not necessary that all governments follow the same tax code. You may have to pay taxes in various countries on the same transaction due to the differences in the tax regulations in those countries.
When the same income is taxed twice in two countries, it is double taxation. In this article, we will see, what is double taxation relief, the provisions of double taxation relief in India, and how you can get relief from double taxation.
What is double taxation relief?
As discussed earlier, due to the differences in tax regulations, the same income may be subject to tax in two different countries.
Identify for reasons four essentials for good combustion in a cylinder. This is called double taxation relief.
Types of double taxation relief
Generally, double taxation relief is provided in two ways. One is called Bilateral Relief, and the other is called Unilateral Relief.
When relief is provided when governments of two countries come together and decide which government will tax which type of income and the extent of taxation through an agreement, it is called Bilateral Relief.
It is not possible for governments to enter into agreements with all countries to avoid double taxation. So, generally, a provision is incorporated in the tax law which allows the taxpayers the credit of tax paid in another country. Since a country provides this relief unilaterally, it is called Unilateral Relief.
Double Taxation Relief Provisions in India
The taxpayers are given relief in both ways in India. Let us first see the provisions regarding bilateral relief. India has entered into Double Taxation Avoidance Agreements (DTAA) with more than 100 countries, including Sri Lanka, Switzerland, Sweden, Denmark, Japan, the Federal Republic of Germany, Greece, etc. So, the taxability of such income, which otherwise would have been doubly taxed, is determined as per the provisions of DTAA.
And if the provisions of tax law are more beneficial to the taxpayer than the DTAA, then the provisions of tax law will remain applicable. However, to claim the benefits of DTAA, the taxpayer must furnish the Tax Residence Certificate.
Now coming to Unilateral relief, you need to know the following provisions:
- The assessee is resident in India during the previous year in respect of which the income is taxable.
- The income accrues or is deemed to accrue or arise outside India.
- The income in question has been subjected to income tax in the foreign country in the hands of the assessee.
- The assessee has paid tax on the income in the foreign country.
- There is no agreement for relief from double taxation between India and the other country where the income has accrued or arisen.
So, if these conditions are satisfied, you can claim relief even if there is no DTAA between India and the other country. You will get a deduction from the Indian Income Tax payable.
The amount of deduction would be calculated on such doubly taxed income as per the provisions of the Income Tax Act, of 1961.
These provisions state that the deduction amount will be equal to an amount calculated on such doubly taxed income at the Indian rate of tax or the rate of tax in the foreign country, whichever is lower. Let us understand this with the help of an example.
Double Taxation Relief Example
Let’s say your Indian income from a business in India is Rs. 6,00,00. And you have earned a pretax foreign income of Rs. 2,00,000, which is taxed @ 15% in the foreign country.
You have invested in ELSS during the financial year, Rs. 1,50,000, to get the deduction under Sec. 80C. So, your tax liability under Indian income tax would be calculated as follows:
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