Introduction to Double Taxation
Double taxation refers to the phenomenon where an individual or a company is required to pay taxes twice on the same source of earned income or capital. It occurs due to overlapping tax laws and jurisdictions, most commonly when income is taxed both at the source (where it is generated) and at the domicile of the taxpayer (where the taxpayer is resident). Double taxation can significantly hamper global economic growth and the free flow of goods, services, and capital, thus proving detrimental for businesses and individuals alike.
Forms of Double Taxation
Economic Double Taxation: This type of double taxation occurs when different taxpayers are taxed more than once on the same item of income or capital. For instance, a company pays taxes on its profits, and then its shareholders are also taxed on the dividends they receive from those profits.
International Double Taxation: This form of double taxation happens when the same taxpayer is taxed in two or more countries for the same income or capital during the same period. This is the most common form of double taxation, especially relevant in our increasingly globalised economy.
Relief from Double Taxation under Indian Taxation Laws
The Indian taxation laws have devised various methods to mitigate the effect of double taxation, primarily focusing on International Double Taxation.
Bilateral Relief (Double Taxation Avoidance Agreements - DTAA): India has entered into DTAAs with numerous countries to avoid and reduce double taxation. These agreements ensure that the same income is not taxed twice, once in India and again in the foreign country where the income arose. For instance, the DTAA between India and the USA allows a tax credit in the USA for taxes paid by residents in India and vice versa.
Unilateral Relief: In instances where there is no DTAA between India and the other country, the Income Tax Act, 1961 provides unilateral relief under Section 91 to Indian residents. This relief allows an Indian resident to claim a tax credit for taxes paid in a foreign country.
Provisions under the Income Tax Act, 1961
Section 90: This section empowers the Central Government to enter into an agreement with the government of any other country for granting relief from double taxation. It also provides for the exchange of information to prevent evasion or avoidance of income tax and recovery of income tax.
Section 91: This section caters to countries with which India does not have a DTAA. If an Indian resident has paid tax in a foreign country on income accrued abroad, they can claim a deduction for the taxes paid in the foreign country from their income tax payable in India.
Case Law Illustration: Union of India v. Azadi Bachao Andolan
The landmark judgement of the Supreme Court in Union of India v. Azadi Bachao Andolan (2003) 132 Taxman 373 clarified the legal position regarding the DTAA. In this case, it was held that the provisions of the DTAA would have an overriding effect over the general provisions of the Income Tax Act, 1961. Therefore, a taxpayer who is eligible to be governed by the DTAA can claim the benefits under it.
Conclusion: Safeguard Against Double Taxation
In conclusion, double taxation can pose a significant burden on taxpayers and inhibit international trade and investment. However, the Indian taxation laws, in synergy with international agreements, provide relief mechanisms that effectively address and mitigate the impact of double taxation. Whether through DTAAs (Section 90) or unilateral relief (Section 91), these measures ensure that a taxpayer is not unjustly taxed on the same income in more than one jurisdiction, fostering a more equitable and favourable environment for international business.