Double Taxation Avoidance Agreements & The Provisions of Income Tax Act, 1961
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Since Levy Computation is different in different economies, with Liberalisation, Privatisation and Globalization, different economies started to trade with each other. Hence the issue of double taxation surfaced creating overburden on the assesses.
Hence the need was acknowledged by the countries to set the mechanism so that the right to tax can be exercised in such a manner so that international trade can take place with full efficiency without causing undue burden to the Taxpayer. If the person belongs to one country and he earns income in the foreign country then there is possibility of Double taxation.
2 Basic Rules:
Source rule: income taxed in country in which it originates irrespective of the fact the person is resident or non resident, reason for the tax is that the person is utilising the source of the country.
Residence rule: income should be taxed in the country in which the taxpayer resides.
But if we apply both the rules then the problem of Double taxation is surfaced.
There can be 2 types of relief.
Section 90 and 90 A of income tax act 1961 deals with bilateral relief.
Section 90 states as to who has the power to sign DTAA.
Central government is empowered to sign DTAA with other nation’s government or with a specified territory of foreign country outside India. Which means CG per-se will not get with other government ,Eg hong Kong is part of china , still DTAA can be signed e.g. with New York ,etc provided that country shall also have provision of the DTAA
Which would prevail DTAA or Income Tax?
Usually DTAA prevails as it is special law , and it is a general law
But 90 (2) states that whichever is beneficial to the assesses will prevail.
There is an overriding aspect an exception says Chapter 10 A GAAR provision Override DTAA also even if DTAA is beneficial
Substance Over Form
Transaction done within a law but purpose is of tax avoidance , then if the total amount of tax benefit is more than 3 crore , then it is deemed that the substance is wrong but form is correct , they say impermissible avoidance agreement.
Section 90a states the power to enter DTAA is given to specified association of a country , specified association is association which function under a law in the country , e.g. RBI, SEBI, ICAI etc with the better half of other country ,
Eg RBI can sign DTAA with other similar association only not with ICCI
Will be valid only when it is approved and notified by the central government in the official gazette
Section 91 of Income Tax Act 1961 talks about unilateral relief,
This method provides relief of some kind by the home country even where there is no mutual agreement entered into by the or where there is no DTAA between the source country and the resident country.
The requirements under section 91 are as follows:
Person should be Indian resident , and
The income should not accrue or arise in India ,
That income should not be deemed to accrue or arise in India ,
Neither be Indian income nor deemed income
Assesses should have been taxed in the foreign company and he has paid the tax
No DTAA should exist in between the source country and In India.