It is a scheme where the Governments of two countries enter into a 'double taxation avoidance agreement' which is worked out mutually in order to provide relief against the problem of double taxation. Such an agreement for bilateral relief may be based on two methods:-

• Exemption method of relief:- It is a method in which the two countries agree that income from various specified sources which are likely to be taxed in both the countries should either be taxed only in one of them or that each of the two countries should tax only a particular specified portion of the income so that there is no overlapping. Such an agreement results in complete avoidance of double taxation of the same income in the two countries.


• Tax credit method of relief:- It is a method in which the two countries agree that if any item of income is taxed in both the countries, the assessee (tax-payer) is liable to have his income taxed in both the countries but is given a deduction, from the tax payable by him in his/her home country, of a part of the taxes paid by him thereon, usually the lower of the two taxes paid.

In India, Section 90 of the Income Tax Act relates to bilateral relief. Under it, the Central Government of India has entered into agreements with the Governments of other countries. These agreements called as "double taxation avoidance agreements (DTAA's)", provide for the following:-

• Granting of relief in respect of:- (i) income on which income tax has been paid both in India and in that country; or
  (ii) income tax chargeable in India and under the corresponding law in force in that country to promote mutual economic relations, trade and investment, or



• The type of income which shall be chargeable to tax in either country so that there is avoidance of double taxation of income under this Act and under the corresponding law in force in that country.

In addition the Central Government may enter into an agreement to provide:-

• For exchange of information for the prevention of evasion or avoidance of income tax chargeable under the Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or


• For recovery of income tax under the Act and under the corresponding law in force in that country.

India has entered into DTAA with 65 countries including countries like U.S.A., U.K., Japan, France, Germany, etc. In case of countries with which India has double taxation avoidance agreements, the tax rates are determined by such agreements. The types of agreements under DTAA's can be majorly categorised as:-

• Comprehensive Agreements:-These are elaborated documents which puts forward in detail that how incomes under various heads may be dealt with.



• Limited Agreements :-These are entered into to avoid double taxation related to the income derived from operation of aircrafts, ships, carriage of cargo and freight.



• Other Agreements :- including double taxation relief rules.

Effects of such double taxation avoidance agreements are as follows:-

• If no tax liability is imposed under the Income Tax Act, the question of resorting to the agreement would not arise. An agreement cannot impose any tax liability where the liability is not imposed by the Act.



• If a tax liability is imposed under the Act, the agreement may be resorted to for negating or reducing it.



• In case of difference between the provisions of the Act and of an agreement under this section, the provisions of agreement prevail over the provisions of the Act and can be enforced by the appellate authorities and the court.



• Where there is no specific provision in the agreement, it is the basic law, that is, Income Tax Act which will govern to taxation of income.



• Where the Government of State certified that a person is a resident of that State or has a permanent establishment in the State, the certificate is binding on the other Government.

The steps involved in granting such a bilateral relief are:- (a) Compute the total income of person liable to pay tax in India in accordance with the provisions of the Income Tax Act. The liability to tax arising under the Income Tax Act is subject to provisions of the double taxation avoidance agreements between India and foreign country. (b) Allow relief as per the terms of the tax treaty entered into with the other contracting company, where the taxation has suffered double taxation. Under the section, the assessee is given relief by credit/refund in a particular manner even though he is taxed in both the countries. Relief may be in the form of credit for tax payable in another country or by charging tax at lower rate.

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