Double taxation refers to a situation where the same income
becomes taxable in the hands of the same company or individual (tax-payer)
in more than one country. Such a situation arises due to different rules
for taxation of income in different countries. The two main rules of income
tax which may lead to double taxation are:- (i) Source of income rule,
under which the income of a person is subjected to taxation in the country
where the source of such income exists i.e. where the business establishment
is situated or where the assets/property is located irrespective of whether
the income earner is a resident in that country or not; and (ii) Residential
status rule, under which the income earner is taxed on the basis of his/her
residential status in that country. Hence, if a person is resident of
a country, he/she may have to pay tax on any income earned outside that
country as well. Thus, the same person may be taxed in respect of his/her
income on the basis of source of income rule in one country and on the
basis of residence in another country leading to double taxation. In other
words, the problem of double taxation may arise on account of any of the
following reasons:-
- A company or a person may be resident
of one country but may derive income from other country as well, thus
he/ she becomes taxable in both the countries.
- A company or a person may be subjected
to tax on his/ her world income in two or more countries, which is known
as concurrent full liability to tax. One country may tax on the basis
of nationality of tax-payer and another on the basis of his/ her residence
within its border. Thus, a person domiciled in one country and residing
in another may become liable to tax in both the countries in respect
of his/ her world income.
- A company or a person who is non-resident
in both the countries may be subjected to tax in each one of them on
income derived from one of them. For example, a non-resident person
has a permanent establishment in one country and through it he/ she
derives income from the other country.
In India, the liability under the Income
tax Act arises on the basis of the residential status of the assessee
during the previous year. Hence, if the assessee is resident in India,
he/she has to pay tax not only on the income which is received in India
but also on that income which accrues, arises outside India or received
outside India. Thus he/ she becomes liable to pay double taxes. This puts
unnecessary and prohibitive burden on the tax-payer. If the tax rates
are sufficiently high, it may even leave him/her with a negative balance.
It also has harmful effects on the trade and services as well as on movement
of capital and people across countries.
The relief
against such double taxation in India has been provided under Section
90 and Section
91 of the Income
Tax Act. They contain two ways of double taxation relief.
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