Double Taxation is a highly debated concept in tax law. Double taxation as can be inferred by its very terminology, refers to the process of paying tax on the same income, twice. When income is taxed at both the corporate and individual level, double taxation occurs. Double taxation generally occurs on an international level when taxes need to be paid on the same income in two different countries.
The fact that corporations and individuals are considered as distinct from each other is a major factor responsible for the double taxation. Taxes are applicable on the income of corporations in the same way they are applicable on incomes of individuals.
There is no specific legislation in India that talks about double taxation – leading to a lot of confusion regarding its applicability. Taxes have been mandated under the Constitution of India. Through Article 265 of the Constitution, taxation has been statutorily recognised. Article 265 states that “no tax shall be levied or collected except by the authority of law”. In the case of Union of India v. Azadi Bachao Andolan [1], the Apex Court stated that “liability to taxation is a legal situation and payment of tax is a fiscal fact.” Taxation has no independent existence. Its applicability works on the basic of law.
But when we speak about double taxation, there is no specific rule which would clarify whether it is correct to implement this principle. In the case of Avinder Singh Etc. v. State of Punjab & Anr. Etc.[2] the Apex Court observed that imposing double taxation has not been prohibited by any provision of the Constitution. Authorities administering the tax laws are not in favour of double taxation and quite often tend to avoid subjecting it to incomes if possible.
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Double taxation and dividends have been another important point of discussions. Some people are of the view that it is extremely important to tax individuals on their dividends at a personal level along with implementing taxes at a corporate level to prevent them from getting away without paying any tax on their personal income. Double taxation occurs when companies pay dividends to the shareholders which can otherwise be prevented if such dividends are not paid to such individuals.
Double taxation is often faced by businesses with a presence across the globe. In these companies, often is tax applied on income that is earned in one country by that country as well as the country where such business is being managed and controlled.
To avoid double taxation of businesses operating between them, many nations sign Double Tax Avoidance Agreements (DTAAs). The provisions of the DTAA apply on individuals who are residents of one country, but their source of income is in a different country. As of date, India has signed DTAA with more than eighty countries. For example, the Intergovernmental Agreement to Improve International Tax Compliance and to Implement FATCA [3] with the United States of America is a DTAA between India and the US.
A DTAA generally covers income tax, wealth tax, education cess and associated duties. However, as per the Finance Act 2013, one cannot take the protection of a DTAA if he fails to present a Tax Residency Certificate to the authority imposing taxation. A tax residency certificate can be obtained by making an application to the income tax authorities.
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The Income Tax Act, 1961 provides for two types of relief against double taxation: Unilateral relief and Bilateral Relief. Section 91 covers the unilateral relief. Even in the absence of a DTAA with another country, an individual or corporation can escape double taxation if certain conditions are fulfilled. These conditions require the individual or corporation to have been a resident of India in the previous year and the income should have been received by them outside India in the previous year. Tax should have been applicable on income both in India and the country with which there is no DTAA. One final condition is that such individual or corporation had paid tax in that foreign country.
Section 90 provides for bilateral relief. There are two methods through which bilateral relief may be sought: the exemption method and the tax credit method. Both methods provide relief through the DTAA signed with other countries. Through the former, if tax has already been paid in the foreign country where the income is earned, it will not be subjected on such income in India. And through the latter, credit can be claimed by the individual or corporation for the taxes paid outside India which will in turn be used to pay taxes in India. Despite the prevalence of DTAAs, double taxation is still a reality – both in India and around the world. Businesses should be structured keeping this reality in mind.
[1] (2003) 263 ITR 706 (SC)
[2] 1979 AIR 321
[3] The Foreign Account Tax Compliance Act
