In all nations of the world tax is levied on the basis of “Source” and “Residence”. The source denotes that income should be taxed in the country where it originates no matter whether the income accrues to a resident or a non-resident. On the other hand residence stipulates that taxation should occur in the country where the taxpayer stays.
The concept of double taxation:
If both rules apply at the same time, business entities will suffers tax from both sides which would deter the process of globalization. At this point of time “Double Taxation Avoidance Agreements” come into play.
Sections 90 and section 91 of the Income Tax Act:
There are two sections – section 90 and section 91 of the Income Tax Act, 1961 which gives relief from paying double tax.
The residential status determines whether a person is resident or a non-resident. The application of sections 90 and 91 can be illustrated with the help of the following –
1. Resident:(i)Bilateral agreement with a foreign nation – Section 90 & 90A apply
(ii)No such agreement with a foreign nation – Section 91 applies
2. Non-resident:Not taxable
Hence we can say that section 90 applies to cases where India has a bilateral agreement with the other country whereas section 91 applies to cases where India has no such bilateral agreement but unilateral agreement.
How to calculate relief under section 90?
First of all one has to include the income earned and taxed in a foreign country in the income earned in India. Then one should compute the income tax on the total income comprising the two. Thereafter one has to calculate the average rate of tax and multiply it with the income earned from the said foreign country. At last one should deduct the tax paid in the foreign country from the tax so calculated. The amount computed is the amount of relief under section 90.
Example – An example will make it clear. In case of a resident let us suppose the income earned in India amounts to Rs.5,00,000/- and the income earned from a foreign country amounts to Rs. 2,00,000/- The total income comes to Rs. 5,00,000 + 2,00,000 that is Rs. 7,00,000/- Tax calculated on 7,00,000/- is Rs. 1,18,450/- The average rate of tax is 16.92% The average tax on foreign income equals to Rs. 33840/- The income tax paid in the foreign country is Rs. 50,000/- As such relief under section 90 is Rs. 33.840/- Therefore tax payable is equal to Rs. 84,610/-
Relief under Section 91:
If a resident in India in any previous year proves that from his income accrued during that year outside India he has paid income tax in any country with which there is no agreement under section 90 for avoidance of double taxation, under the law prevailing in that country, he shall get deduction from income tax payable by him in India amounting to a sum calculated on the twice taxed income at the rate of tax of the said country or that of this country, whichever is less.