Double taxation avoidance agreements and income tax act

8.6       The charging section is section 4 of the Indian Income Tax Act and it charges income tax on the total income of the ‘previous year’. Section 5 gives the scope of total income and it is ‘subject to other provisions of this Act’ including section 90 of the Act.

8.6-1    The statutory provision-section 90- Section 90 of the Act authorizes the Central Government to enter into double taxation avoidance agreements with foreign governments. Thus the charge under the Indian Income Tax Act is subject to terms of double taxation  avoidance agreements.. Section 90 provides that the assessment of the non-resident of India will be governed by the provisions of the Act or Double Tax Avoidance Treaty whichever is more beneficial to the non-resident. The aforesaid position has also been clarified by a circular issued by the Central Board of Direct Taxes, the apex body of tax administration in India, which is binding on the tax administration.

Jurisdiction to tax on worldwide income is conferred upon the State by its own laws, but it is sought to be limited by the tax agreements on the basis of reciprocity. The tax agreements put a limitation on the domestic tax laws in their application to income which have been subject matter of tax elsewhere. However, these do not invest a State with a jurisdiction to tax income, which it does not have under its own laws.

Basis issues

Three basis issues have to be decided before the tax liability is fastened on a person. These relate to-

(a)                residence,

(b)               the source of income, and

(c)                permanent establishment

Residence – The possibility of a person having a dual residential status cannot be ruled out. Tax agreements, therefore, contain a provision to avoid dual residence by listing number of tie breaking rules.

Source- ‘Source’ means something from which income arises. Each country determines source according to its own laws. There is a possibility of conflict in determining the source in either of the two countries. The agreements determine the country of the source in respect of various classes of income. As a general principle, income with an Indian source is taxable in India. Where, however, the person is resident of another country and he is receipt of income in respect of an Indian source, the taxability of income in India will be determined by whether the person in non-resident in India or whether he is a resident of a country with which India haw a double taxation avoidance agreement.