Relief for Double Taxation in India: Sections 90, 90A, and 91

In an increasingly globalized world, it’s common for individuals and businesses to earn income in multiple countries. However, this cross-border income often leads to double taxation, where income earned abroad is taxed both in the country where it is earned (source country) and the country where the taxpayer resides.

Double taxation can place a heavy financial burden on taxpayers, making relief provisions essential. The Government of India provides such relief primarily through Double Taxation Avoidance Agreements (DTAAs) under Sections 90 and 90A of the Income Tax Act, and through unilateral relief under Section 91.

In this article, we’ll delve into these sections to understand how India provides relief for double taxation, the mechanisms involved, and practical examples to illustrate the concepts.

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What is Double Taxation?

Double taxation occurs when the same income is taxed twice in two different jurisdictions. For example, if an Indian resident earns income in the United States, both India (the country of residence) and the U.S. (the country of source) may levy taxes on this income. This double burden can lead to significant financial strain on taxpayers, impacting both individual and business incomes.

Relief Mechanisms for Double Taxation

India has implemented specific provisions to address double taxation issues:

• Sections 90 and 90A: These sections allow India to enter into DTAAs with other countries, providing relief from double taxation through either the exemption method or the tax credit method.
• Section 91: For countries without DTAAs with India, Section 91 provides unilateral tax relief on income that has been taxed both in India and the foreign country.

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Understanding Section 90: Double Taxation Avoidance Agreements (DTAAs)

The Government of India enters into Double Taxation Avoidance Agreements (DTAAs) with other countries under Section 90 of the Income Tax Act. These agreements specify which country has the right to tax specific types of income. There are two main methods for providing relief under DTAAs:

1. Exemption Method: In this approach, a particular income is taxed in only one country. For example, if the DTAA specifies that interest income will be taxed only in the country of residence, then the source country will not tax this income.
2. Tax Credit Method: Here, income may be taxed in both countries. However, the taxpayer’s country of residence allows a credit for the tax paid in the source country. For instance, if a taxpayer pays tax in a foreign country on income earned there, India (the country of residence) will grant a credit for the tax paid abroad, reducing the Indian tax liability on the same income.

In India, relief is often provided through a combination of both methods, depending on the type of income involved and the terms of the specific DTAA.

Key Effects of DTAAs

DTAAs not only help in reducing double taxation but also provide clarity and legal certainty. Some key points to note:

• No tax liability under the Act: If an income is not taxable under the Indian Income Tax Act, DTAAs do not create any new tax liability.
• Override domestic law: DTAAs override domestic tax laws to the extent they are more beneficial to the taxpayer. If there is a conflict between the DTAA and Indian tax laws, the DTAA provisions take precedence.
• Specified Income Types: DTAAs often include provisions for taxing income types such as dividends, interest, royalties, and technical fees, ensuring that taxpayers aren’t doubly taxed on these common forms of cross-border income.

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Section 91: Unilateral Relief for Double Taxation

Section 91 of the Income Tax Act provides unilateral relief when an Indian resident earns income in a country with which India has no DTAA. In such cases, the taxpayer can claim relief on the doubly taxed income if certain conditions are met:

1. The taxpayer must be a resident of India for the relevant financial year.
2. Income must have been earned outside India during that year.
3. The foreign country must have levied income tax on the income.

To calculate the relief under Section 91, follow these steps:

1. Identify the doubly taxed income (income that has been taxed both in India and abroad).
2. Calculate the Indian tax rate and the foreign tax rate.
3. Relief is provided based on the lower of the two tax rates applied to the doubly taxed income.

Example of Unilateral Relief Calculation

Suppose an Indian resident earns ₹6,00,000 from a foreign business and pays ₹1,20,000 in taxes abroad, with a tax rate of 20% in the foreign country. If India’s tax rate on this income is 15%, the relief under Section 91 will be based on the lower of the two rates, i.e., 15%.

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Section 90A: Double Taxation Relief for Specified Associations

Section 90A allows specified Indian associations (for instance, professional organizations or trade associations) to enter into tax agreements with associations in other countries. This provision allows:

• Avoidance of Double Taxation: Indian associations can negotiate tax relief similar to a DTAA for their members.
• Exchange of Information: Facilitates the exchange of tax information to prevent tax evasion.
• Tax Recovery: Allows Indian authorities to recover income tax due under the terms of the agreement.

The Central Government has the authority to notify such agreements in the Official Gazette, which are then enforceable under the Income Tax Act.

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Practical Examples of Double Taxation Relief

To illustrate how these relief mechanisms work, here are a few hypothetical scenarios:

Case 1: Relief through a DTAA (Section 90)

• Taxpayer Profile: X Ltd., an Indian company.
• Income: ₹5,00,000 earned in India, ₹2,00,000 earned in a foreign country (with a DTAA).
• Foreign Tax Rate: 20%
• Indian Tax Rate: 30%

Under the DTAA, the foreign income is subject to a tax credit method. X Ltd. will pay Indian taxes on the total income but receive a credit for the ₹40,000 (20% of ₹2,00,000) tax paid abroad. This reduces the overall tax liability.

Case 2: Unilateral Relief (Section 91)

• Taxpayer Profile: Y, an individual resident in India.
• Foreign Income: ₹8,00,000, taxed at 15% abroad (no DTAA).
• Indian Tax Rate on Income: 10%

Since India does not have a DTAA with this foreign country, Y is eligible for unilateral relief. Y will receive relief based on the lower Indian tax rate of 10%, reducing the amount of double taxation on the income.

Case 3: Relief under Section 90A for Specified Associations

A specified Indian association enters into a tax agreement with a similar association in a foreign country, helping its members avoid double taxation on international consultancy fees. Under Section 90A, the members benefit from tax relief, exchange of information, and simplified tax recovery processes.

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Key Takeaways for Taxpayers

• Understand the DTAA Provisions: Taxpayers should review DTAAs between India and the foreign country involved to determine whether they qualify for the exemption or tax credit method.
• Maintain Proper Documentation: Accurate records of foreign income, tax paid, and deductions are essential to claim relief effectively.
• Calculate Relief Correctly: Be sure to use the correct tax rates when calculating unilateral relief to avoid underpayment or overpayment.

These provisions ensure that Indian residents and businesses can mitigate the financial impact of double taxation, keeping their cross-border ventures profitable and compliant with both Indian and foreign tax obligations.

Penalties for Non-Disclosure of Foreign Income

Navigating tax compliance, particularly regarding foreign income, is complex, and failure to disclose these earnings accurately can lead to significant penalties. The Government of India has set strict penalties for various types of non-compliance to encourage transparency and deter tax evasion. Here’s a breakdown of the potential penalties taxpayers might face for issues related to foreign income:

1. Default in Tax Payment
   When taxes are not paid correctly, the tax authorities may impose a penalty that does not exceed the amount of tax payable. This penalty ensures that taxpayers meet their tax obligations promptly, serving as a deterrent against delayed payments or non-payment.
2. Under-reporting of Income
   If the taxpayer’s declared income is less than what tax authorities determine, a penalty of 50% of the tax payable on the under-reported income is levied. This substantial penalty is meant to discourage taxpayers from intentionally under-declaring their income to reduce their tax liability.
3. Failure to Maintain Documents and Books of Accounts
   Maintaining accurate records of foreign transactions is essential. Generally, failing to maintain the required documents and books of accounts incurs a penalty of ₹25,000. However, if foreign transactions are involved, the penalty can increase to 2% of the value of such international transactions. This penalty reinforces the importance of maintaining transparent and thorough records of all foreign and domestic financial activities.
4. Penalty for Fake Documents
   If the tax authorities discover fake invoices or fraudulent documentary evidence—such as invoices for non-existent goods, services, or transactions from non-existent entities—the penalty is equivalent to the sum of such false or omitted entries. This high penalty aims to deter taxpayers from creating or using counterfeit documents to evade taxes and stresses the importance of providing legitimate documentation.
5. Penalty for Not Filing an Income Tax Return
   Failing to file an income tax return on time incurs a penalty of ₹5,000. This penalty encourages timely and accurate filing of tax returns, which is essential for ensuring proper tax administration and compliance. Filing returns accurately and on time helps taxpayers avoid legal issues and penalties.

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Why It’s Crucial to Disclose Foreign Income

The penalties for non-disclosure of foreign income are severe because of the importance the government places on transparency and tax compliance. With increased global scrutiny and cooperation between countries on tax matters, tax authorities can detect undisclosed foreign income more effectively. Non-disclosure can lead to hefty fines, legal actions, and, in some cases, criminal prosecution.

To avoid these penalties, taxpayers should:

• Keep accurate records of all foreign income and assets.
• Declare foreign income accurately on their tax returns.
• Maintain proper documentation and receipts to support claims and deductions.

Understanding these penalties and staying compliant with tax laws can save taxpayers from costly fines and help maintain their financial standing with the tax authorities.