The double taxation avoidance agreement is an agreement which aids the taxpayer to get relief from double taxation on the same income. If India has signed any double taxation agreement with any foreign country; it means that the taxpayer of those countries does not have to pay the tax on the same income in both the countries. Therefore, double taxation avoidance agreement is a useful tool that helps the taxpayer to avoid “double taxation”.
In the case of claiming relief under double taxation avoidance agreement two essential things are needed to find out. These are:
The source country rule holds that income is to be taxed in the country in which it originates irrespective of whether the income accrues to a resident or a non-resident whereas the country of residence rule specifies that the power to tax should rest with the country in which the taxpayer resides. If both rules apply concurrently to a business entity and it was to suffer tax at both ends, the cost of operating on an international scale would deter the process of globalization and would become prohibitive. It is from this point of view that Double Taxation Avoidance Agreements (DTAA) becomes very crucial.
The key purpose of the double taxation avoidance agreement is to give relief to the taxpayer from double taxation. A country entered into a double taxation avoidance agreement with a foreign state so that; by this agreement it can prevent double taxation of the same income in different countries. In India, section 90 and section 91 of the income tax act deals with the double taxation avoidance agreement.
Section 90 (2) of the Income Tax Act, 1961 explains that if India has double taxation avoidance agreement with any other foreign country then it is the assessee who will decide that which provision is more helpful for them and that provision will apply appropriately
To avoid paying tax on the same income twice, one can use the provisions of the Double Taxation Avoidance Agreement, a tax treaty that India has signed with many countries.
Every individual who is a legal resident of India is liable to pay taxes in India on her or his global income. However, non-residents have to pay tax only on the income earned in India or from an activity or a source carried out in India.
A resident of India is defined as a person who has been in India for a period of 182 days or more in the financial year or who has been in India for 60 days or more in a financial year and 365 days or more in the 4 years before that financial year.
Non-Resident’s definition under the Income Tax Act, 1961 is tied to the number of days of an individual’s stay in India during a particular financial year. A person is Non-Resident under IT Act if his stay in India does not exceed 181 days in a financial year (1st April to 31st March of next year).
The mechanism of double tax avoidance can be effected in either of the following two ways:
Under the Double Tax Avoidance Agreement, NRIs don’t have to pay tax twice on the following income earned from :
The procedures which are needed to be followed for claiming relief from double taxation are as follows :