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Udeetta Sarma

December 27, 2024

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Double Taxation Relief under Section 90 of the Income Tax Act

People often make money across the border since income is earned globally in a world where borders have disappeared. While this can offer a huge upside, it also results in a problem – double taxation. Double taxation arises when two countries tax the same income source: one being the propriety country from which Income is earned and the other being the residence ion where the taxpayer lives. For this, countries including India have provisions in tax laws like Section 90 of the Income Tax Act which here help to reduce your tax liability and eliminate double taxation.

Sections 90, 90A, and 91 of the Income Tax Act, of 1961; provide taxpayers relief as these sections provide for avoidance and mitigation of double taxation. These measures help ensure that income derived from cross-border activities is taxed fairly and that taxpayers are not subjected to excessive tax costs on their global operations.

Understanding Double Taxation

There are mainly two types of double taxation:

Jurisdictional Overlap: The two countries both claim the right to tax the same income. For example, an Indian resident having income in the USA would be taxable in both the country.

Corporate Taxation: Businesses that operate in multiple jurisdictions may be taxed on the profits that they earn in the source country and again when those profits are paid out as dividends in the residence country.

Double taxation substantially diminishes net income, so any relief statutes are important to encourage trade and employment across borders.

What is Section 90 of the Income Tax Act?

Section 90 provides that the Indian government can enter into the MOU in the form of DTAAs. These treaties aim to divide taxing rights between India and the other contracting states so that the same income is not taxed twice. India has over 90 DTAAs with countries like the USA, UK, Canada, Australia, Singapore, etc.

Relief under DTAAs is provided in two broad ways:

Elimination of Double Taxation: By exemption or credit methods (described below).

Concessional tax rates: DTAA provides for concessional rates for certain incomes, such as royalties, interest and dividends.

You might also be interested in ‍Section 133(6) of the Income Tax Act.

Key Methods of Relief under Section 90

Exemption Method :

Under this method, some income may be taxed exclusively in one country. Suppose, for example, a DTAA between India and the USA says that certain income, i.e. capital gains will be taxable only in the USA. Then, India will exempt such income from taxation.

Credit method:

The income is taxed in both countries under the credit method. The country where you are a resident (in this case, India), gives you a credit for taxes paid in the source country. This prevents the taxpayer from having to pay more than the greater of the two tax rates.

For instance, a resident of India earns $10,000 in the UK with a 15% tax rate. If India’s tax rate is 20% on the same income, that individual will:

Pay 15% ($1,500) as tax to the UK.
Claim credit for $1,500 against their Indian tax liability ($2,000).
Pay the balance of 5% ($500) to the Indian government.

What is Section 90A of the Income Tax Act?

In particular, Section 90 relates to the agreements between India and foreign governments (for instance, a Double Taxation Avoidance Agreement), whereas Section 90A allows Indian associations (like professional or trade associations) to enter into agreements with similar associations in foreign jurisdictions. Double Taxation Networks: These agreements provide relief from double taxation for agreement-based members, which promotes international cooperation and reduces tax burdens for members.

Section 91: Relief in the Absence of DTAA

In the absence of a DTAA between India and the country of source, the tax will be charged by the country's tax rates and norms. That is where Section 91 comes in so it provides unilateral relief to the residents of India. It allows taxpayers to claim credit for taxes paid abroad, even without an agreement.

For instance, if an Indian resident earns an income in a country where there is no double taxation avoidance agreement (DTAA), and they pay 10% tax in that country, they can claim credit for that 10% against their tax liability in India.

How to Claim Relief under Sections 90 and 90A

Taxpayers must take certain steps to claim relief under these provisions:

Get a Tax Residency Certificate (TRC):

A TRC clarifies the residency status of the taxpayer, which is necessary to claim benefits under a DTAA. Tax Resident Certificate in India: Indian residents should apply to their jurisdictional tax office.

Remit Form 10F:

The non-resident taxpayer claiming the DTAA benefits may be required to submit Form 10F, wherein they need to provide the particulars like their name, address, and tax ID in the foreign country.

Adequate Documentation:

Maintaining proper documentation like proof of foreign taxes paid, Tax Residency Certificate (TRC), income details, etc. would be required to substantiate the claim. It is necessary to keep these documents for inspection during assessments.

Practical Examples of Double Taxation Relief

Case 1:

Salary Income You are an Indian resident and work in a US company that pays you $50,000/year The income is taxed at 10% by the USA. So if the same income is taxed at 30% in India, then this individual will:

Taxed 10% to the USA ($5,000)
Submit $5,000 in India
The remaining 20%($10,000) in India.

Case-II:

Dividend Income A resident Indian receives dividends from a Singaporean company on shares that he holds there. But instead of the 10% deduction at source on dividends that India allows, Singapore taxes it only at 5%. The taxpayer will:

Pay 5% in Singapore.
Take a 5% credit for the amount against their Indian liability.
Only pay the 5% balance in India.

Advantages of Double Taxation Relief

Alleviates the liability of cross-border trade:

This brings a sense of relief to individuals and businesses wanting to work internationally, as the removal offers opportunities for them to trade with or invest in other countries without fear of multiple sets of tax liabilities.

Promotes Economic Cooperation:

The economic tie-ups among the parties can be strengthened if a DTAA facilitates the smooth exchange of services, investments and ideas from one party to another.

Provides tax equity:

The exemption provisions protect taxpayers from double taxation while also ensuring that the tax system is fair.

It Enables Mobility Across the Globe

This enables expats to make a decision on whether or not they can take up employment overseas without the fear of paying more tax than needed.

To keep learning more about income tax laws in our country you can also refer to Section 10 of the Income Tax (IT) Act: Exemptions and Allowances.

Challenges in Double Taxation Relief

While the benefits of this approach go without saying, there are challenges with it:

Complicated:

The Rules provided under the DTAA change widely from one country to another and, hence perceiving aTAAs helps truly biddable.

Documentation Burden:

To claim this relief, taxpayers must maintain extensive documentary information which is quite onerous.

Changes in Tax Laws:

Because tax treaties and domestic laws change frequently, taxpayers should make sure they are staying current to avoid non-compliance.

Conclusion

Tax relief (through tax credit) is given to Indian Residents for income earned outside India, under sections 90, 9OA &91 in Income Tax Act. These provisions along with the use of Double Taxation Avoidance Agreements (DTAA) and statutory relief measures unilaterally eliminate taxpayers' exposure to income generated elsewhere in other parts of the world. These are essential whether you are a company starting in other territories or working at the exterior nation.

As you can see, it is not as easy forward so the taxpayers should get professional help but at the same time, they must know their rights and comply with their responsibilities. Due diligence can prevent, among other factors double taxation relief and identify keep preparing.

For more information just go to the Income Tax Department of India's official website.

Simplify Your Tax Compliance with Swipe

It can become complex to get cross-border tax relief which is not easily provided under Sections 90, 90A, and then Section 91. Swipe offers you professional help, automated tools and a seamless service to get yourself “the DTAA Benefit Claim Processed”, or to get your Tax Residency Certificate made available (Form 10F) — all hassle-free.

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FAQ

1. What is Double Taxation and How Does It Happen?

Source of Double Taxation The source country (where income is earned) and the residence country (place of residence of the taxpayer) can tax the same income leading to double taxation. Such a financial burden is taken care of through relief measures such as DTAA or provisions in the statute.

2 . What is the difference between the exemption method and the credit method under Section 90?

Under the exemption method, income is only taxed in one country and exempt in another, which prevents double taxation. Under the credit method, the taxes paid in the source country are credited against the tax liability in the residence country, so that the taxpayer will realize a tax burden no greater than the higher of the two tax rates.

3. How does a Tax Residency Certificate (TRC) help in claiming relief from double taxation?

TRC is a document that establishes the residency status of a taxpayer and is necessary to claim the beneficial treatment under a DTAA. The certificate, issued by the taxpayer’s country of residence tax authorities, also serves as evidence of its eligibility for relief.

4 . What if there is no such DTAA with the country of income?

In the absence of a DTAA, relief is granted under Section 91 of the Income Tax Act. Now, the one-sided relief enables Indian individuals to claim a credit against such taxes paid in the foreign country, so that they may not be taxed twice.

5. What is Section 90 of the Income Tax Act? What does it do?

Section 90 provides for entering into DTAAs with foreign countries. These treaties lay down which country will have the right to tax which income, by preventing double taxation on the same income. Tax relief is granted similarly either via an exemption (the income will be taxed in only one of the countries) or a credit (the taxes paid in the source country will be credited against the liability in the residence country).

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