Page 287 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes 12.3.2 Rules Due to which Double Taxation Arises

Double taxation means taxation of same income of a person in more than one country. This
results due to countries following different rules for income taxation. There are two main rules
of income taxation i.e.
(a) Source of income rule: Under which the income of a person is subjected to taxation in the
country where the source of such income exists i.e. where the business establishment is
situated or where the assets/property is located irrespective of whether the income earner
is a resident in that country or not; and
(b) Residence rule: Under which the income earner is, taxed on the basis of his/her residential
status in that country. Hence, if a person is resident of a country, he/she may have to pay
tax on any income earned outside that country as well.
As per source of income rule, the income may be subject to tax in the country where the source of
such income exists (i.e. where the business establishment is situated or where the asset/property
is located) whether the income earner is a resident in that country or not. On the other hand, the
income earner may be taxed on the basis of his/her residential status in that country.

Example: If a person is resident of a country, he may have to pay tax on any income
earned outside that country as well. Further, some countries may follow a mixture of the above
two rules.
Thus problem of double taxation arise if a person is taxed in respect of any income on the basis
of source of income rule in one country and on the basis of residence in other country or the basis
of mixture of above two rules.
In India, the liability under the Income tax Act arises on the basis of the residential status of the
assessee during the previous year. Hence, if the assessee is resident in India, he/she has to pay
tax not only on the income which is received in India but also on that income which accrues,
arises outside India or received outside India. Thus he/ she become liable to pay double taxes.
This puts unnecessary and prohibitive burden on the tax-payer. If the tax rates are suffi ciently
high, it may even leave him/her with a negative balance. It also has harmful effects on the trade
and services as well as on movement of capital and people across countries. The relief against
such double taxation in India has been provided under Section 90 and Section 91 of the Income
Tax Act. They contain two ways of double taxation relief.
A condition in which two or more taxes may need to be paid for the same asset, fi nancial transaction
or income is known as double taxation. It generally takes place due to the overlapping of the tax
laws and regulations of different countries. Thus, double taxation occurs when a taxpayer is
charged income tax, both at his country of residence as well as in the country where the income
is generated. Taking into account the laws of income tax in India, a non-resident becomes liable
to tax payment in India, given that it is the place where the income is generated. Moreover, he
has to additionally bear the burden of tax payment in his own country, by virtue of the inclusion
of the same income in the ‘total world income’, which forms the tax base of the country where
he resides.

Notes To effectively deal with the problems related to double taxation, Central Government,
under Section 90 of the Income Tax Act of1961, has been certified to enter into Double

Tax Avoidance Agreements (DTAA) with other countries. These agreements are meant
to alleviate various problems related with double taxation. So far, India has entered into
Double Taxation Avoidance Agreements with 65 countries, including U.S.A, Canada, U.K,
Japan, Germany, Australia, Singapore, U.A.E and Switzerland. The tax treatises offers
relaxation from double taxation, by providing release or by providing credits for taxes
paid in one of the countries.

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