Income taxpayers in India can claim relief under Sections 90, 90A, and 91 of the Income Tax Act of 1961 as per the Double Taxation Avoidance Agreement (DTAA) provisions.
Due to a thriving global business environment, many individuals in India have foreign income sources. Such earnings can attract double taxation, where source and resident countries might levy income tax on the same individual or company income. India has signed the DTAA with more than 94 countries to help individuals prevent paying twice on the same income.
To successfully implement the DTAA, Sections 90, 90A, and 91 of the IT Act have been designed. They discuss tax relief clauses to counter the issues associated with the probability of double taxation.
Types of Double Taxation Reliefs Offered
There are two types of reliefs offered to prevent double taxation, which are:
- Bilateral Relief
Bilateral relief is for situations in which the DTAA has been signed between the two countries. There are two methods under this segment: exemption and credit methods.
- Unilateral Relief
When there is no agreement between the home and resident countries, the home country is responsible for offering tax relief and preventing double taxation. Section 91 discusses the unilateral relief segment in detail.
Section 90 of the Income Tax Act
Section 90 of the Income Tax Act is applicable in the presence of the Double Taxation Avoidance Agreement (DTAA). It ensures that no individual pays income tax twice while working for a foreign company.
If an individual is working in a foreign country or an expatriate is working in India, the DTAA prevents both governments from levying taxes simultaneously. It is an agreement where both parties are required to allow relief by a foreign tax credit or exemption method under the bilateral agreement to ensure a one-time tax deduction.
What is Section 90A?
Section 90A is applicable if the DTAA agreement has been signed between specified associations of two countries. When a specific organisation or association in India has signed the DTAA with an organisation in a foreign country, tax relief can be claimed under Section 90A.
This section follows a process similar to Section 90; the only difference is that the agreement is between two institutional bodies instead of two countries.
What is Relief Under Section 90A?
Since Section 90A applies to two organisations who have signed DTAA, tax relief is offered as a tax credit on the tax paid in a foreign country if it exceeds the minimum tax payable in India. The process is similar to Section 90 of the Income Tax Act.
What is Section 91 of the Income Tax Act?
Under Section 91 of the Income Tax Act, an individual is eligible to claim tax relief if a DTAA is absent between India and another country. India has DTAA with more than 94 countries; however, double taxation relief is offered even on income from other countries under Section 91 of the IT Act.
The unilateral relief method is applicable in this case due to the absence of DTAA. Since the individual is paying taxes in two different countries, the lowest payable tax rate can be claimed as tax relief.
Section 91 of Income Tax Act with Example
This section is applicable to residents and non-residents from those countries that haven’t signed DTAA with India. Tax credit or exemption is offered via a unilateral method.
For example, if you have paid 35% tax in a foreign country, but as per the Indian tax bracket, you need to pay 25%, you will get 25% tax relief in India because this rate is lower between these two.
Difference between Double Taxation Relief and Double Taxation Avoidance
Here are some aspects of double taxation relief and avoidance that highlight their differences:
Double Taxation Relief:
- Tax benefits are provided via bilateral or unilateral means.
- Tax relief is provided either as per the exemption method or the credit method.
- Double Taxation Relief Under Sections 90, 90A, and 91 can be claimed irrespective of whether there is a Double Taxation Avoidance Agreement (DTAA) signed between India and the foreign country.
Double Taxation Avoidance:
- This is applicable as per an agreement between the Indian government and other foreign country governments.
- It stops the governments from levying income tax twice on the same income by providing tax relief.
- Double Taxation Avoidance is applicable under Sections 90 and 90A of the Income Tax Act.
Calculation of Foreign Tax Credit
The foreign tax credit shall be computed separately for each source of income. It shall be lower of
- Tax payable on such income under the Income Tax Act and
- Taxes paid in the Foreign country;
The Taxes paid in the Foreign country shall be determined by converting foreign currency at TTBR (Telegraphic Transfer Buying Rate) on the last day of the month immediately preceding the month in which the foreign tax has been paid or deducted.
Computing double taxation relief under section 90:
Step 1: Compute Total Income, i.e., the aggregate of Indian income and Foreign income;
Step 2: Compute tax on such total income under Income tax;
Step 3: Compute the average rate of tax (amount of tax divided by total income);
Step 4: Compute an amount by multiplying such average rate of tax with foreign income;
Step 5: Compute tax paid in a foreign country
The amount of relief shall be lower of steps 4 and step 5
E.g., Mr. A, an Indian resident, earned an income of Rs. 2,00,000 in India. He also earned income from the USA equivalent to Rs. 3,00,000 (Tax paid in foreign country Rs. 20,000). The tax relief Mr A can claim and the tax he shall be required to pay is computed as follows:
Step 1: Total income is Rs. 5,00,000 (Rs. 2,00,000 + Rs. 3,00,000)
Step 2: Tax on global income Rs. 12,500
Step 3: Average rate of tax is 2.5% (12,500/5,00,000*100)
Step 4: Tax to be paid in India on foreign income is Rs. 7,500 (3,00,000*2.5/100)
Step 5: Tax paid in foreign country is Rs. 20,000
The amount of relief shall be lower of step 4 and step 5, i.e., Rs. 7,500
Computing relief under section 91:
Step 1: Calculate the tax payable in India
Step 2: Compare the Indian tax rate and foreign tax rate
Step 3: Multiply the lower tax rate with the doubly taxed income. This will be the amount of relief under section 91.
E.g., Mr. X has doubly taxed foreign income of Rs. 2,00,000. Tax payable in India is at the rate of 30%. The foreign tax rate is 20%. The relief shall be calculated as follows:
Step 1: Tax payable in India will be Rs. 60,000 (2,00,000*30%)
Step 2: Lower of the Indian rate of tax (30%) and foreign tax rate (20%) is 20%.
Step 3: The relief will be Rs. 40,000 (2,00,000*20%)
The amount of relief will be as computed in Step 3, i.e. Rs. 40,000.
Penalties for non-disclosing of Foreign Income
Default in tax payment: The tax authorities shall determine the penalty amount leviable. However, such a penalty amount will not exceed the amount of tax payable.
Under-reporting of income: The penalty shall be 50% of the tax payable on under-reported income, i.e., income declared by the taxpayer is less than the income determined by the tax authorities.
Failure to maintain relevant documents and books of accounts: The penalty leviable is Rs.25,000 generally. In case of foreign transactions are involved, 2% of the value of such international transactions.
Penalty for fake documents such as counterfeit invoices: In case of income tax authorities find that the books of accounts provided by the taxpayer contain fake invoices or any fake documentary evidence, a sales invoice or purchase invoice without actual supply or receipt of goods or services or from a person doesn’t even exist, omission of significant transactions for the computation of taxable income. A penalty equivalent to the sum of such false or omitted entries may be levied.
Penalty for not Filing an Income Tax Return: A penalty of Rs.5,000 will be levied if Income Tax Return is not filed.
Final Word
To prevent double taxation, Sections 90, 90A and 91 establish some clauses allowing taxpayers to claim benefits and pay tax only once on their foreign tax earnings. Both tax credit and relief are applicable depending on the presence or absence of DTAA or the type of applicant.