Before the introduction of the double taxation avoidance agreement, it has been seen in many cases where the income of an assessee becomes taxation in more than one country. For example: As we know that for resident Indians the global income shall become taxable in India. However, if the resident Indian earned income in the US which becomes taxable there and also taxable in India, in that case, such assessee had to bear the weight of 2 taxes on the single income. Similarly, if any non-resident has earned income in India which becomes taxable in India as well as in its residence country then also, he would have to pay tax in 2 countries on the single income. This is where the government has introduced the Double taxation avoidance agreement (DTAA). We will understand this in question-answer form.
Ques: How does DTAA prevent the hardship as explained above and avoid double taxation on the same income?
Sol: Government will provide relief to the assessee in the following manner:
- Bilateral relief: Countries with whom India is having an agreement, will adopt this method. Under this method, the following options have been given to the assessee which is as follows:
- Exemption Method: Under these options, the assessee will have to pay tax only in one country and the agreement will prescribe this thing that whether the person would have to pay tax in his residence country or the other one. In other words, the income of the assessee shall be taxable only in one country.
- As per these options, income shall be taxable in both countries however the country in which such assessee is having the residency, will allow the exemption at the time of filing of his return.
Ques: Whether it is mandatory for the person to comply with DTAA even if its results in a disadvantage for him?
Sol: No, It is to be noted that the provisions of DTAA shall be applicable only when it becomes beneficial to the assessee. For Example: if as per tax laws with a foreign country, the royalty is to be taxed @35% then it will be beneficial for the assessee to apply Indian income tax law as Section 115A of the income tax act where the royalty rate is 10% is more beneficial to the assessee.
Similarly, If a Non-resident receives any dividend from an Indian company and as per DTAA, such dividend is taxable @ 10% in India, then DTAA shall not apply but section 10(34) of income tax shall apply. which provides that the dividend is exempt from tax in India.
Ques: Whether the tax rate as mentioned in DTAA is further increased by cess and surcharge?
Sol: No, If the rate of DTAA is to be applied on assessee then the same shall not be increased by surcharge or any cess.
Ques: Whether the assessee has to pay double tax on the same income if the other country does not have DTAA with India?
Sol: If the assessee has earned any income outside India in the financial year in which he was the resident of India, In that case, he shall be eligible to claim the deduction from the Indian income-tax payable. However, to claim the deduction, he has to satisfy a few conditions which are as follows:
- The assessee should be a resident of India in the previous year in which the income becomes taxation in a country other than India.
- The income should not be accrued or arise in India.
- The income in question should be taxable in the foreign country.
- The assessee has already paid the tax on such income in the foreign country.
- There should not be any agreement exists between India and the foreign country in which the income becomes taxable.
If all the above conditions are satisfied then the assessee shall be eligible for the deduction of lower of the following amount:
- Tax on such doubly taxed income at the rates applicable in India which shall be computed as under:
Tax on the Total Income in India x Such double-taxed Income/Total Income in India
- Tax on such doubly taxed income at the rates applicable in a foreign country which shall be computed as under:
Tax paid in Foreign Country x Such double-taxed income/Total Income assessee in Foreign Country
This can be easily understood with the help of a simple example:
Ex.: Mr. A resident of India receives a royalty on books from a foreign country amounting to Rs.10,00,000 during the year ended 31.3.2020.
A foreign company has deducted the TDS of Rs.50,000 and sent the remaining amount of Rs.9,50,000 on 30.4.2020.
India does not have a double taxation avoidance agreement with the government of the foreign country from which royalty is received.
The expenses incurred by Mr. A on earning the royalty are Rs.2, 10,000. His income from other sources
is Rs.50,000. Compute the tax payable by Mr. A.
|Profits from PGBP||Amount|
|Income from Other sources||1,50,000|
|Less:||Deduction Under section 80QQB||3,00,000|
|Tax on 6,40,000||40,500|
|Plus:||Cess @ 4%||1620|
|Less:||Relief under section 91||24500|
In the above example, the net foreign income shall be:
|Deductions under section 80QQB||3,00,000|
Now, the foreign income included in the total income is Rs.4,90,000 and hence the doubly taxed income is Rs.4,90,000. The relief shall be calculated as follows:
- 42,120/ 6,40,000 X 4,90,000 = 32,248
- 50,000/ 10,00,000 x 4,90,000 = 24,500
Hence, the relief shall be Rs.24,500 and hence the net tax payable shall be Rs.17,620.
This concept will be helpful not only to non-residents but also to the Indian residents as for the Indian residents the global income is taxable in India. And for Non-residents, if they have earned income in India on which they had paid tax in India and In their resident country also then they can claim the deduction by using the above method.
I have tried to explain the concept of DTAA for residents and non-resident in a simple manner with the help of examples. If you have any doubt in relation to the above topic or taxation of non-resident then you can contact us on the number as shown in our site. We will be pleased to assist you.