Double

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CAUSES A'NJ)'UMEDmSOJI' DOUBU 1'AXADON
3.1. eau.. of double tuatioa
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.Double is owing to different cowuries fonowml different rules. or mix of rules
The two main rules 11'1 (II) "1OUtCc of'l.- . ,:
rvI and (sometimes, rule. \I", Income
to tax iIl.y COUIlIIy f(X the
ntIIIDII .... source 0 t Income (busUlflll . b
lOaQ capital,. property/asset) is situated ill .. of
wbIIher the Income-earner is or is ItOt a ....... tIoitbeaof Chat ve 0
.... from sources situated in fora, .ucIa 9iJI .C0U8I1y. However, Income
..... reaident or DOt. The problem': doIMe ..:: ,taxed f. 'the bands .y
in of.any income inlbe f<nip CGUatry on Ibe-e:. c:r..:!ce -: :
-tIleD m his home COUll,? based Oft" _ . ru
0::':::; :"":':: oJ ::...lIu:o .... f.' . Residents-(or-'
establishment. iav-= wa of:::a mcome, ,!bether the source
IIl111edln their home country or abroad 1biJ ruti or loan. captta!. IS
the purview of taxation even if the of IbeU (non-cltizens) from
ruJe will make double taxation certain if the locally .. this
impares tax based on the "source of' < w IS source of a resldent S IRcome
Income ,,.....
(e) Mix of ",oure. of mco ... "11114 ",.. III t: 104_ "
rrd!II. It is a basis of taxation ti II' ed by ., ,cNUi ,IIip) of ,"c" ..... ",,,.,,,
(ciCiamsbip)<of the rul of the it, the "residence
, elsa ...... to tax the fClldeftts (cItizens) in respect of
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lheir foreign income. and the "source of income" rule is followed to laX noo-residents (non
citizens) Oft lbeir local incomes. .
3%. R.medles of double tuatioa
." COMu,lo11111 ,_ """",.111. The home counlly may tax fOieiln income of its
residOfifl ,at 'a lower ..... compared to tax rate applicable to local income. Howe'Ver, tbis win
onlynduce and not altosetbetwipc out the effect of double taxation. ,
'(II) BiIau,Gl 4Dd,. tu ." ",.at. The home cou-.try may enter into bilateral
double laX .voidance apeements with odter countries so as to avoidlreduce the of,.
double taxation on its aaideDtS. A double laX 1IV0idance a ..... t soeksto balaac:e the _1IIioD
rights of the concerned in respect of crossborder such that ....
counlly loses tax revenue OIl int:omes fallinl onder its jurisdiction. 'It rules for
determining reside_ of penons. penraaaent' establi .... nt,.ource& of'income; 'iDi)":'"
ria. of COfttracting countriel. It also provides the far adminisSrative
between the contractinl countries. It is beneficial to residents of f?oth' II it .....
beaitby them and ilavesbDent by an
of as reprds tax consequences. However. the apcementi$preceded
__ pi ... for elWllPlf. in return for living up 011 an)' riJbts. .eacb country. iaaiJts
on a matching concession. There cannot be absolute parity betwCM the riahts of barpiniRl
cowatries and with economic clout can . .,......in its
Neverthelcss,mOJCiel laX treaties drawn up by the OECD an4 the Nations have
sought to correct anomalies in the agreements between developed and developing countries.
(c) tlDu"k tIU Ir " ", .'r ..... "t. It is not a popular method to
take care o( effects of laXation. It is also quite complicated to implement In .. y case,
India is not a member of any of the three important multilateral double tax treaties, i .. 'tbe
Andean Pact. Comecon and Nordic: Treaty.
(tI) T.u t,."" ,IIoppin6. It refers to a case where a resident of one counlly _Its to
obtain tax benefits available under double laX,avoidance treaty between two odter countries. The
modu.r operandi is as follows :. Suppose X, a resident in India, wants to invest in
Nigeria. but there is no double laX avoidance treaty between India and Nigeria. In such a case,
on his investment income in Nigeria. he will be liable to tax at regular rates in both Nepria
and India. Now suPP9Se. he routes his in.vestment in Niaeria throu,b a company in South
Africa. which has double tax avoidance' 'IlgNement both with India and Nipria. This way, he
caq avail tax- benefits in fespect of investment income in Nigeria even though India has no
agreement with'thatcclUntry.
Abuse of tax treaty provisions by means of laX treaty shopping is quite common. For
example, many foreip companies prefer to route their investtnents in India through Mauritius.
because of low tax rates in that country, and because Mauritius has double tu avoidance
agreement with India. Tax treaties often contain provisions t\) check such abuse to ensure that
benefits unci them are genuine residen&s of the contracting countries.
3Pl. X Ltd. and Y Ltd. ".two limited liability coapanies illCQrpo(IIled in Mauritius. Two
- accountants in Mauritius and a banker in Hoq Konl are directors of the two cotnpanies.
The meetlnls of tbe Board of 'directoJ'l are beld in or chaired from Mauritius. Bacb company bas
invested over S 60,000 in shares of an Indian bank, Explain the double tax relief available to the
companies in respect of their dividend income, based on the followin. infotmation.
(a) There is a double taxation avoidance agreement between India and Mauritius accordinl to
which divideuO payable to a resident of Mauritius would be subject to withholding tax (TDS)
not excecdiq 'SCJII, while capital lains arising to bim from transfer of shares would not be
taxable in India. '
(b) The whole of share capital ofeacb of the companies ill held by a British Bank.
(c) There is a double taxation avoidance aareement between India and the United KinJdom
accordinl to whicb dividend payable to a resident, of the United Kinldom would be charpd
Tax on total iac:omo ( .. y. RI. 2,00,(00)
auaaed in India
(Pint RI. 40,000: NU: Next RI. 20,000 : at Next Rs. 90,000 : at
Balance R . 50,000, at 3O'J,)
Averase me of tax
(RI. 3S,OOOIRa. )( loa)' ,
Tax Oll iftCO. me ( ... 60,(00) ""'ft ...
Avertp rate of tax MIPIicable in c:OuaCiY :
"ntr.T.oUft'r.tIF.OOCfX 'tOlJ1 .--
AnlauMto ......... " \ I' 'I'. .
(to he eemputed' at avenae .. appIk:IIbIe in foreip COUDtty. beina lower qf the two
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,
\
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1'1
Rs.

6,000

6.000
.... ,...: RI. 60.000 )( ItWtOO) '. - _. \
..... (lb.),. .. hl6,(J(iG) 'mlil, \ \ .", \ 29,000
\.\, 1,'.) ... ,t: .. .. ".."."..""" .... ,. .. ."..."., fa /...". PIe ... oJ\a'fit*.
\JeIiiIIl._,CMe ..... tofoJlo ... ',,\f,' , .
.. e is who JKCyio,us yoari.fClIPCCl of"" share
"'1 \ ,. , ,"
) \ .. _ year as rcsideDt in ladia, .
',Uqt noo-rellident IWCssee accruina durin, the previous year
',,; r Inctia it i, .,eX have .".. ,
. ,(d), in4!=ed Qf otherwise.
,;\' .. l"iti\, ,torc:jp .for or .. voidance of.
If the as above are satisfJCCI, the reliof to will be 'pUted in the
.... .............. ...... --. ,
,
. ,j ,,' ' . \'. "
2. Disti",uish betWCCII person81 and impenonal tax liability.
3. Hq" .. relief ptovided under Sec. 90 ., . .
4. .. " . .. .. ,cI"'-' 1 iWpeCt of an
::::-e:=. in Inclia and ia a texation
S . How is a resident provided relief urlder See. "'" . .,
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