Indian companies are taxable in India on their worldwide income, irrespective of its source and origin. Foreign companies
are taxed only on income which arises from operations carried out in India or, in certain cases, on income which is deemed to have arisen in India. The later includes royalty, fees for technical services, interest, gains from sale of capital assets situated in India (including gains from sale of shares in an Indian company) and dividends from Indian companies. Thus, the tax-liability on income of a company depends upon the residential status of the company.
- It is an Indian Company; or
- The control and management of its affairs is situated wholly in India. In case of Resident Companies, the total income liable to tax includes [section 5(1)]:-
Similarly, a Company is said to be non-resident during any relevant previous year if:-
- Any income which is received or is deemed to be received in India in the relevant previous year by or on behalf of such company
- Any income which accrues or arises or is deemed to accrue or arise in India during the relevant previous year
- Any income which accrues or arises outside India during the relevant previous year.
- It is not an Indian company,and
- The control and management of its affairs is situated wholly/partially outside India. In case of Non-Resident Companies, the total income liable to tax includes[section 5(2)]:-
- Any income which is received or is deemed to be received in India during the relevant previous year by or on behalf of such company
- Any income which accrues or arises or is deemed to accrue or arise to it in India during the relevant previous year.
As a result a situation may arise where the same income becomes taxable in the hands of the same company in one or more countries, leading to 'Double Taxation'. 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 becomes taxable in both the countries.
- A company/person may be subjected to tax on his 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 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 world income.
- A company/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 derives income from the other country.
In India the relief against double taxation has been provide under Section 90 and Section 91 of the Income Tax Act.
- Section 90 of the Income Tax Act relates to bilateral relief. Under it, the Central Government has entered into an agreement with the Government of any country outside India. These agreements called as "double taxation avoidance agreements (DTAA's)" , provide for the following:-
- Granting of relief in respect of:-
- Income on which income tax has been paid both in India and in that country or
- 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.
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. 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 (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.
The liabilities to tax arising under the Income Tax Act are subject to provisions of the double taxation avoidance agreements between India and foreign country. Thus the treaty provisions shall prevail over the income tax provisions.
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.
- Section 91 of the Income Tax Act relates to unilateral relief. Under it, if any person/company is resident in India in any previous year and paid the income, which accrued to him in India, to any country with which there is no agreement (under Section 90) for relief from double taxation, he shall be entitled to deduction from the Indian Income-tax payable by him of a sum calculated on such doubly taxed income at the average Indian rate of tax or the average rate of tax of said country, whichever is lower, or at the Indian rate of tax if both the rates are equal.
The steps involved in calculating relief under this section are:- (a)Calculate tax on total income(including foreign income) and claim relief applicable on it (b)Add surcharge and education cess after claiming rebate under the Section 88E (c)Compute average rate of tax by dividing the tax computed in previous step with the total income (d)calculate average rate of tax of foreign country by dividing income-tax actually paid in the said country after deduction of all relief due (e)Claim the relief from the tax payable in India at the rate computed in previous two steps on the basis of whichever is less.
For more details visit our Section on 'Doing Business Abroad'