Unilateral relief under DTAA

While authorizing entering into DTAA with other countries, the domestic law of India viz. Income Tax Act takes care to ensure relief to a resident of India in respect of his income arising in a country with which India has no DTAA if such income has suffered tax in the host country and tax has been paid by him there. The relief is provided under section 91 of the I.T.Act in the form of allowing deduction from Indian income-Tax chargeable in respect of doubly taxed income, of an amount equal to tax on such income calculated at Indian rate of tax or the rate of tax of the foreign country, whichever is less. If both rates are equal, deduction is allowed of an amount calculated at Indian rate of tax.

For example ‘A’ a resident of India derives income of Rs. One Lakh in the form of fees for technical services rendered in country ‘X’. This income is subjected tax say @ 30% and an amount of Rs.30,000/- is paid as tax in that country. His "total income" in India including this foreign income is Rs.5 Lakh on which tax payable works out to say, Rs.1,25,000/-. The average rate of Indian tax is Rs.1,25,000/- ¸ Rs.5,00,000/- i.e. 25%. The Indian rate being lesser, a deduction of an amount equal to 25% of the doubly taxed income of Rs.1,00,000/- i.e. Rs.25,000/- will be allowed as deduction out of the total tax liability of Rs.1,25,000/-. This takes care, to a significant extent, the problem of double taxation i.e. taxation in India as well as in country ‘X’.

The domestic tax laws contain many provisions for either exempting totally or partially foreign source income, or permitting the taxpayers to deduct foreign income-tax in the same manner as other items or cost or expenses. The other provision relates to the grant of foreign tax credit. Such measures are taken without reference to a corresponding or reciprocal agreement with the other country. For example, in Indian Law, various exemptions for foreign source of income have been provided e.g. complete exemption is provided in respect of interest payable on the money borrowed from, or the debts owned to, the sources outside India by the Government or by an industrial undertaking under an agreement approved by Government or any financial institution- (Section 10(15)(iv) of the Income Tax Act). There are provisions permitting deduction, inter alia, in respect of remuneration in the case of professors, teachers, in respect of professional income of authors, playwrights, artists, musicians, actors or sportsmen from foreign sourcing to the extent of 25 percent to 50 percent of such income. (Sections 80RR, 80-O of the Income-tax Act). Some of these exemptions are not for providing relief against double taxation, but for encouraging such services and encouraging earning of foreign exchange. For example, under section 80-O, where an Indian company or a resident non-corporate tax payer receives any royalty, commission, fees or any similar payment from the government of a foreign State or a foreign enterprise in consideration for the use outside India of any patent, invention model etc., or information concerning industrial, commercial or scientific knowledge experience or skill available to the foreign government or for technical or professional services rendered outside India to the foreign government or to the foreign enterprise, 50% of the income brought into India in convertible foreign exchange is reduced from the total income liable to tax. There are various exemptions in respect of income earned by non-residents in India under section 10 of the Income Tax Act. Besides this, there is a system of providing foreign tax credit. Under the foreign tax credit system, foreign income of resident is subject  to India tax liability in India arising from the receipt of foreign income. It is, however, limited to the Indian income-tax payable on that income.  The essential feature of foreign tax credit is that the country allowing deduction for it treats as if it were paid to itself within certain statutory limitations of its domestic laws.

SECTION 91 AND UNILATERAL RELIEF

8.8       The Income-tax Act seeks to reduce the impact of double taxation by allowing foreign taxes to be credited against the amount of tax as is chargeable in India on the same income. This is done unilaterally and the credit is allowed as follows.

1. Where the foreign tax equals the Indian tax rate, only the foreign tax will be payable;

2.  Where the foreign tax exceeds the Indian tax, no tax will be payable in India; and

3. Where the foreign tax paid is less than the Indian tax, there is a liability on the balance upto the Indian tax rate.

The benefit of such adjustment is given only in case the person is resident in India during the relevant year.