Double Taxation Relief

India allows relief from double taxation of income in the following ways:

Unilateral relief : A resident of India deriving income from a country with which India does not have a tax treaty is eligible to claim credit for taxes paid in the foreign country. However, such credit would be restricted to Indian taxes on such foreign income or actual foreign taxes paid, whichever is less.

Bilateral relief : India has a comprehensive tax treaty network with over 90 countries to avoid double taxation of income. Under the Indian tax laws, a taxpayer can avail of the provisions of the tax treaty or domestic tax laws, whichever is beneficial to the taxpayer.

Typically, bilateral relief is provided through the ‘credit method’ or ‘exemption method.’ In order to avail of the beneficial provisions of a tax treaty, non-resident companies and entities are required to obtain a valid Tax Residency Certificate (TRC) from the government of the country of residence along with other prescribed documents and information.

The government has issued comprehensive guidelines about the mechanism for claiming tax credit in India for foreign taxes paid by an Indian resident. The same is effective from 1 April 2017 onwards.

Aligning Double Taxation Avoidance Agreements (DTAA) with Multilateral Instrument (MLI)

India has signed the MLI with representatives of many other countries, and the provisions of the MLI apply to India’s DTAAs from FY 2020-21 onwards. The MLI applies alongside existing DTAAs.

Article 6 of MLI provides for modification of the Covered Tax Agreement to include the following preamble text:

To align the scope under the preamble text of the MLI with the scope mentioned under the Act, an amendment is proposed to Sections 90 and 90A to insert the above modification.

A new definition has been inserted by Finance Act 2021 to define the term ‘liable to tax’ to mean that there is an income tax liability on a person under the law of his country for the time being in force and also includes a person who has subsequently been exempted from such liability under the law of his country. This term will have a crucial impact on deciding cases where treaty benefits are to be granted.