Double Taxation Avoidance Law for Taxpayers in India

Double taxation
Double taxation

One of the most visible consequences of globalization is the presence of multinational commercial entities earning income spanning across territories and jurisdictions. So, if you are an NRI, a PIO, a foreign tourist, or just a person in India to perform a hit song, you need to know how Taxation policies here affect tax policies in your country of residence.

Legal Provisions of Double Taxation Avoidance Agreement Implementation in India

Section 90 of the Indian Income Tax Act provides relief from Double Taxation to persons who earn incomes in another country but still maintain relations with this one. For the provisions of this Section to be applicable on the individual, she must obtain a certificate under Rule 21AB of the Income Tax Rules from the Government or governing authority of the country or territory to which the international agreement made between itself and India applies.

Double Taxation Avoidance Law for Taxpayers in India

In addition to obtaining the certificate mentioned above the tax assessee must fill up Form 10F with the following information:

  1. Status of the assessee, whether individual, firm or company.
  2. The name of the country or territory where the person was born or firm/company was incorporated.
  3. The Unique Identification Number that identifies the tax status and obligations from the person’s place of residence.
  4. The period of residential status in the foreign country.
  5. Residential address in the foreign country.

Apart from these, the non-resident must also possess documents supporting any claims made in Form 10F. Once an Assessing Officer has verified such status, the non-resident will be issued a certificate of residence known as Form 10FB.

An association of persons as specified in the DTAA document with the concerned territory can also obtain relief from being taxed twice under Section 90A containing similar provisions. Both of these entities may apply for a certificate of residence through Form 10FA to the tax department.

Section 91, on the other hand, prescribes the procedure to be followed when the non-resident earns income in a country with which India has no Double Taxation Avoidance Agreement. Such a person will have to prove that income tax has been paid in that foreign country with relevant documents.

Once this is done, the person can claim tax deductions by an amount which is the lower of the two: Indian rate of tax and the foreign territory’s rate.

India’s foreign taxation model is based on the OECD (Organization of Economic Cooperation and Development) treaty templates.

A very common example for foreign taxation is a BPO unit in India. The government will apply taxes to the parent entity not resident in India only if the unit is a Permanent Establishment of that parent entity.

From April 1, 2018, the provisions of Chapter X-A of the IT Act, better known as the General Anti Avoidance Rules of Section 95 and onwards, will become applicable regardless of any agreements existing in law. This is because the imperatives of preventing tax evasion and tax avoidance across boundaries outweigh considerations of individual benefit. Nevertheless, governments may take a call in the interests of investor sentiment and business simplification.

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