Chapter XXIII
Relief from double taxation
23.1 Ordinarily, countries follow both the principle of residence-based taxation and the principle of source-based taxation. However, if two countries tax the same income, one based on the principle of residence and the other based on the principle of source, it could lead to double taxation of the same income. Hence, countries have agreed on certain principles to avoid double taxation.
23.2 The United Nations (UN) and the Organisation for Economic Co-operation and Development (OECD) have developed a series of model treaties to avoid double taxation. India has also evolved its own model and, based on this model, entered into double taxation avoidance agreements with about 75 countries. However, it must be noted that each agreement contains some variations and exceptions that are usually the result of negotiations between India and the other country. The double taxation agreements are of two kinds : (i) comprehensive DTAAs which cover all kinds of income ; and (ii) limited DTAAs which cover only income from shipping and/or air transport.
23.3 A double taxation avoidance agreement provides for certainty on how and when will income of a particular kind be taxed and by which authority. The right to tax of each country is defined. If one country has the right to tax a certain income, provision is made for the other country to give tax credit or exemption to that income in order to avoid double taxation.
23.4 The right to tax may be allocated to either country by adopting one of the following methods :
(i) Full or partial rights to tax given to the country of residence, and the country of source waiving its right to tax to that extent.
(ii) Full rights to tax given to one country based on source or residence and the other country obliged to exempt that income.
(iii) Full rights to tax by both countries, but with the tax in the source country limited to no more than a specified level and the country of residence giving credit for the tax paid in the source country. Thus, there is a sharing of tax revenues between the two countries.
(iv) Full rights to tax by both countries without limitation and the country of residence giving credit for tax paid in the source country.
23.4 Under the Code, power has been given to the Central Government to enter into an agreement with the Government of any country in order to provide relief on double taxation and also for the purpose of exchanging information for prevention of evasion or avoidance of income-tax. Further, the Code also provides that neither a double taxation avoidance treaty nor the Code shall have a preferential status by reason of its being a treaty or law. Therefore, in the case of a conflict between the provisions of a treaty and the provisions of the Code, the one that is later in point of time shall prevail.
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