Double taxation in India

As if the thought of ‘taxation’ wasn’t enough, we have ‘double taxation’ to deal with! So let’s see what it is, why it happens and how you should deal with it.

Double taxation: What is it?

Double taxation refers to the situation when an individual is taxed more than once on the same income, asset or financial transaction. Yes, this does happen in the real world and many of you may have dealt with it.

Double Taxation: Why is it?

The situation of double taxation usually arises due to overlap of taxation laws of two or more countries. Do you or your business have operations or dealings in a country apart from your residence? You may have come across a situation where you become liable to pay tax in the country of your residence, as well as the foreign country where the transaction took place or where the income was generated. So it’s a case of being a resident in one country, while earning income from another which may lead to a situation wherein you fall under taxation laws of both.

Double Taxation: Double Taxation Avoidance Agreements (DTAA)

Can you imagine what would happen if you were a resident of India, but work for half of the year in Australia, and get taxed in India as well as Australia? It’d be bad. No one would do it. Even the big MNCs would stay away from such disasters.

Keeping this in mind, under section 90 of the Income Tax Act 1961, the central government has entered into DTAA with many other countries. What does this do? Well this agreement aims to put forward equitable basis and means of allocating tax liability in case of an individual who has earned income in a country different from his/her residence. India has an exhaustive agreement with 79 countries and not stopping there, India also aims to give tax neutrality to residents and non-residents who have income arising from countries not included in the DTAA.

Double Taxation: How you can deal with double taxation with DTAA

Generally, income from Capital Gains will be taxed in the country where the capital asset is located at the time of transfer/sale. There are exceptions like Mauritius and Cyprus which don’t levy a capital gains tax even though they are included in the DTAA with India.

If you are concerned about business income, you should know that the source country (where income is generated) can levy tax only if the business has a ‘permanent establishment’ there.

Income from professional services will be taxed in the country of residence, unless you have a ‘permanent base’ in the source country. You may also get taxed in the source country if your stay exceeds 183 days in the relevant FY.

We have discussed the usual circumstances where an individual may face double taxation. So watch out for the double whammy and steer clear of it. If your case is unique and you think that tax neutrality has not been maintained, there are ways by which you can refer to the DTAA and appeal to your domestic / foreign tax departments.