Double taxation can be defined as a practice of taxing the same income twice. The term double taxation is frequently used to refer to the combination of corporate income tax and dividends tax. The basic explanation is that the tax is applied against the income of a corporation and again when the income is distributed between the shareholders as dividends.
To avoid double taxation, countries enter into a DTAA with other countries. The DTAA can be defined as a form of agreement between the countries entering into the contract. The main purpose is to regulate taxes and grant relief from double taxation and the inconvenience caused by taxation of the same income twice. This does not mean that NRIs can avoid taxes completely. DTAA also reduces the chances of tax evasion.
Section 91 of the income tax act 1961 provides for unilateral relief against double taxation. According to this section, an individual can be relieved of twin taxation by the government of India, irrespective of the fact whether the DTAA between India and other foreign countries is in practice or not.
An NRI needs to pay taxes in India on the income earned in India. This income is required to be declared by the country they reside in as per the laws of the country and gets taxed again which leads to double taxation. The provisions for DTAA are not the same in all countries, the provisions might differ according to the laws of the country. There are two types of double taxation.
Juridical Double Taxation: The same income getting taxed twice in the hands of a single taxpayer in two countries.
Economic Double Taxation: The same income getting taxed twice in more than one hand.
DTAA provides relief against Juridical Double Taxation only. India has entered into DTAA agreements with 80 countries such as Unites States of America, United Kingdom, Canada, Australia, Germany, South Africa, New Zealand, Singapore, Mauritius, Malaysia, UAE, Qatar, Oman, Thailand, Sri Lanka, Russia and Kenya.
An NRI can avail of the benefit of DTAA by submitting the Tax Residency Certificate and a few other required documents to the bank to avoid being taxed at higher rates. DTAA overrides provisions of the Income Tax Act in India in 1961. Due to this, an NRI can claim taxation in India as per Income Tax Act 1961 or as per the clauses of DTAA, out of the two whichever is more beneficial to the NRI.
As per the clauses of the tax treaty, relief from double taxation can be either be claimed as per exemption method or tax credit method.
Exemption Method: As per this method, either country has an exclusive right to tax the income of the individual arising in the source country.
Tax Credit Method: As per this method an individual can get the foreign tax credit in the country he resides in respect of tax paid in the source country on the double-taxed income.
Sources of income from which NRIs are exempted from paying taxes twice:
Salary acquired in India
Income through the provision of services in India
Rent from the property in India
Capital gains by means of transfer of assets based in India
Income through any investments in India
Income from any savings bank account in India
Therefore, due to the provision of DTAA and all the relief measures covered under the Income Tax Act, individuals having an income source from other countries can minimize their tax liabilities and avoid being double-taxed.
