Background: Why International Taxation Matters
When a person or company earns income in more than one country, a natural question arises: which country has the right to tax that income? Without clear rules, the same income could be taxed twice, once in the country where it is earned and again in the country where the taxpayer resides. This is called double taxation. International taxation exists to prevent this, or at least reduce its impact, through domestic law provisions and bilateral agreements between countries.
Key Statutory Provisions under Indian Law
Income Tax Act, 1961
This is the primary legislation governing taxation in India, including cross-border income.
- Section 5, Scope of Total Income: Determines what income is taxable in India based on the taxpayer’s residential status, covering income received, accrued, or arising in India, as well as certain foreign income for residents.
- Section 6, Residential Status: Lays down the tests to determine whether a person or company is a resident, non-resident, or resident but not ordinarily resident, which directly affects how much of their global income is taxed in India.
- Section 9, Income Deemed to Accrue or Arise in India: Covers income that is taxable in India even if it is earned by a non-resident, such as income from a business connection in India, or royalty and fees for technical services paid by an Indian resident.
- Section 90, Agreement with Foreign Countries: Allows the Indian government to enter into Double Taxation Avoidance Agreements, commonly called DTAAs, with other countries, and allows taxpayers to choose whichever is more beneficial, the DTAA or the domestic law.
- Section 91, Countries with No Agreement: Provides unilateral relief from double taxation even when India does not have a DTAA with a particular country.
Foreign Exchange Management Act, 1999 (FEMA)
While not a tax statute, FEMA regulates cross-border financial transactions and is closely linked to international taxation, since it governs how foreign income and investments are received and repatriated.
Rights and Obligations at a Glance
| Aspect | Resident Taxpayer | Non-Resident Taxpayer |
|---|---|---|
| Scope of taxable income | Global income taxed in India | Only India-sourced income taxed |
| Governing provision | Section 5 and Section 6 | Section 5, Section 6, and Section 9 |
| Relief from double taxation | Available under Section 90 or 91 | Available under Section 90 or 91 |
| Compliance requirement | Full disclosure of foreign assets and income | Disclosure limited to India-sourced income |
Frequently Asked Questions
It occurs when the same income is taxed in two different countries, once where it is earned and again where the taxpayer resides.
A Double Taxation Avoidance Agreement is a treaty between two countries that allocates taxing rights and provides relief from double taxation.
It is determined under Section 6 of the Income Tax Act, based on the number of days a person stays in India during a financial year.
No, non-residents are taxed only on income sourced from India, unlike residents who are taxed on global income.
Unilateral relief can still be claimed under Section 91 of the Income Tax Act.
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