Why Double Taxation Happens
Countries tax income based on residence (where the taxpayer lives) or source (where income arises). When an Indian resident earns income abroad, both countries may claim taxing rights over it. This overlap is the root cause of double taxation in India and matters most for NRIs, exporters, foreign investors and multinational companies.
Juridical vs Economic Double Taxation
This distinction, juridical vs economic double taxation, is central to the topic.
- Juridical double taxation: the same taxpayer’s same income is taxed by two jurisdictions. Example: an Indian resident’s UK rental income taxed in both countries.
- Economic double taxation: the same income is taxed twice but in different hands. Example: company profit taxed as corporate tax, and the same profit taxed again as dividend in the shareholder’s hands.
Key Legal Provisions
Article 265, Constitution: no tax without authority of law, the base principle for all relief measures.
Article 253, Constitution: empowers Parliament to legislate for treaties, the basis for tax treaties.
Section 90, Income Tax Act, 1961: lets the government sign a Double Taxation Avoidance Agreement (DTAA) with another country; Section 90(2) lets the taxpayer choose whichever, treaty or domestic law, is more beneficial.
Section 90A: similar relief where a specified Indian association enters an agreement with a foreign counterpart.
Section 91: unilateral relief where no DTAA exists, so the taxpayer isn’t left without any recourse.
Rule 128, Income Tax Rules, 1962: procedure for claiming Foreign Tax Credit (FTC), including filing Form 67.
Section 195: TDS on payments to non-residents, often where DTAA benefit is actually applied.
Section 206AA: higher TDS without PAN, though a beneficial DTAA rate can still apply under Section 90(2).
Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015: Sections 43 and 51 penalise non-disclosure of foreign income and assets.
Finance Act, 2020: scrapped Dividend Distribution Tax under the erstwhile Section 115-O, moving dividend tax to shareholders, a direct response to economic double taxation.
Multilateral Instrument (MLI): adopted by India under OECD’s BEPS Action 15 to update existing DTAAs and curb treaty misuse.
How Relief Works
Two broad methods apply under Indian DTAAs and domestic law:
- Exemption method: income taxed in one country is exempted in the other.
- Credit method: income is taxed in both, but tax paid abroad is credited against Indian tax (Foreign Tax Credit).
Rights and Obligations
- Right to pick the more beneficial provision between DTAA and the Act.
- Right to claim Foreign Tax Credit for tax paid abroad.
- Obligation to obtain a TRC under Section 90(4).
- Obligation to file Form 10F if the TRC lacks prescribed details.
- Obligation to disclose foreign income and assets in Schedule FA of the return.
Procedure to Claim DTAA Relief
- Determine residential status under Indian law and the treaty.
- Identify the relevant treaty Article for that income type.
- Obtain the TRC from the foreign tax authority.
- File Form 10F electronically, if required.
- Claim exemption, or file Form 67 to claim Foreign Tax Credit before filing the return.
- Report the relief in the Income Tax Return.
FAQs
Taxing the same income more than once, either on one taxpayer by two countries, or on the same income in two different hands.
No, but the law provides relief through DTAAs and Sections 90 and 91 so taxpayers aren’t unfairly burdened.
A treaty between India and another country to prevent taxing the same income twice; India has such treaties with many countries.
Yes, Section 90(2) lets you apply whichever is more beneficial.
Mainly a Tax Residency Certificate, plus Form 10F if the certificate lacks prescribed details.
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