Double Taxation Avoidance Agreement (DTAA) and Tax Benefits

A double taxation avoidance agreement (DTAA) is the agreement signed between two or more countries to avoid double taxation on the same incomes in two or more countries. It is generally applicable in the cases when an individual is a resident of one country but earns income in another. India is currently having DTAA with 80+ countries.

One of the major reasons to sign DTAA (double taxation avoidance agreement) with other countries is to attract foreign investments in India by avoiding double taxation.The tax benefit is provided as either fully exempt income in the resident country for income earned in a foreign country or as a part of tax rebate provided in the resident country to the extent of the tax paid in a foreign country.

In recent times, we have seen a boom in the global business practices adopted by the companies. Many Indian companies are working globally and many global companies also started their businesses in India. Income Tax Act, 1961 offers benefits under section 90/91 to the assessee for avoiding double taxation.

Relief under section 90/90A:

Relief under section 90 can be claimed only by an Indian assessee if India has signed DTAA with the foreign country or specified association from where the assessee earned any income. So, If India is having any DTAA signed with such a foreign country then relief under section 90 can be claimed and if such DTAA (double taxation avoidance agreement) is with any association then relief under section 90A can be claimed.

Steps for Calculating Tax Rebate Under Section 90:

1. Compute Global Income -Total of Indian income and foreign income
2. Compute tax on global income under Indian Income tax act
3. Compute average rate of Income-tax (Tax amount /Global income)
4. Calculate Income Tax on Foreign Income with the rate arrived in step 3
5. Compute tax paid in a foreign country on such foreign Income
6. Compute lower of amount arrived in step 4 and Step 5 to be claimed as rebated under section 90

Relief Under Section 91:

Relief under section 91 can be claimed when there is no DTAA (double taxation avoidance agreement) agreement between India and a country from which the assessee earns foreign income.

Steps for calculating tax rebate under section 91:

1. Calculate the tax payable in India on such foreign income and tax rate
2. Compare the tax rate in India with the tax rate in foreign
3. Multiply the lower tax rate compared in step 2 with the double-taxed income
4. The resulting amount as per step 3 to be claimed as rebate under section 91

Assessing Residential Status:

To get the Double Taxation Avoidance Agreement benefit under section 90/90A/91 if any assessee is earning foreign income, he needs to first prove that he is a resident of India.

An individual is said to be resident in India in any financial year if he has been in India during that year:

• for a period of 182 days or more; or
• for a period of 60 days or more and has also been in India within the preceding four years for a period or periods of 365 days or more.

Therefore, the residential status of an individual will normally be dependent on his physical presence in India and not on his nationality.

In the case of a person who is resident, the total income of any financial year includes such income which:

1. Is received or is deemed to be received in India in such year by him, or
2. Accrues or arises to him or is deemed to accrue or arise to him in India during such year, or
3. Accrues or arises to him outside India during such a year.

The words “accrue” and “received” are to be understood in their plain general meaning, as there is no particular definition thereof in the Income-tax Act.

So, for resident individuals of India, all the foreign income will be included in their taxable income for which they can claim the benefit or rebate under section 90/90A/91 as discussed above.

Filing of Form 67 to Claim a Rebate of Foreign Taxes Paid:

Resident taxpayers should be aware that they are eligible to claim the deduction of foreign taxes paid by them at the time of receiving foreign income. To claim the deduction of withholding taxes from overall tax liability, the resident assessee is required to file Form 67 on or before the due date specified for furnishing the return of income under Section 139(1).

Form 67 has 4 sections:

• Part A:

Contains basic information such as Name, PAN or Aadhaar, Address, and Assessment Year. You are also required to add the receipt details of the income from a country or specified territory outside India and Foreign Tax Credit claimed.

• Part B:

Details of refund of foreign tax as a result of carrying backward of losses and disputed foreign tax.

• Verification:

This contains a self-declaration form.

• Attachment

Here you need to attach a copy of the certificate or statement and proof of payment/deduction of foreign tax.