SCOPE OF INCOME UNDER THE ACT
- Resident is taxed on his global income under the Act whether it is received, accrued or arose in India or accrued or arose out of India.
- For a Non-resident person, in terms of s.5(2) of the Indian Income Tax Act, 1961,
- All its income, irrespective of sources of derivation thereof, is taxable in India,
- if such income is received or is deemed to be received in India in such year by or on behalf of such person OR
- if such income accrues or arises or is deemed to accrue or arise to him/ it in India;
- during a given year.
- s.9(1) of the Act provides exhaustively as to which incomes shall be deemed to accrue or arise in India
Scenario when income of a resident or a non-resident is governed totally in terms of the provisions of Income Tax Act, 1961(“The Act”)
- Absent a treaty or DTAA, person will be governed totally by provisions of Income Tax Act, 1961 and limited relief will be available as enshrined under s.91 of the Act.
- s.91(1) provides the benefit to an Indian resident in any previous year in respect of his income which accrued or arose during that previous year outside India.
- It provides that:-
- If an Indian resident has paid in any country with which there is no agreement under section 90 for relief or avoidance of double taxation, income tax under the law in force in a country outside India, he shall be entitled to the deduction from Indian income tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of said country whichever is lower.
- S.91(2) provides the benefit to an Indian resident in a given previous year, in respect of any income that arose to him during that previous year in Pakistan.
- s.91(3) provides benefit of deduction from the Indian income tax payable by a non resident of a sum calculated on doubly taxed income at the Indian rate of tax or the rate of tax of a foreign country whichever is lower to a non resident person only in a case where:-
- Such person is assessed on his share in income of a registered firm assessed as resident in India in any previous year;
- such share includes any income accruing or arising outside India during that previous year(which is not deemed to accrue or arise in India) in a country with which there is no agreement under s.90 for avoidance of double taxation and
- he proves that he has paid income tax under the law in force in that country in respect of income so included.
Scenario where a Double Taxation Avoidance Agreement or a Tax Treaty exists
- In case of a tax treaty i.e. an agreement entered into by the Central Government with the Government of any country outside India in terms of s.90(1) of the Act for granting relief of tax or for avoidance of double taxation, in relation to an assesse to whom such agreement applies, the provisions of the Act shall apply only to the extent they are more beneficial to the assesse.
- However provisions of Chapter X-A (pertaining to General Anti Avoidance Rules under the Act) shall apply to the assesse even if they are not beneficial to him.
- Thus, in cases where an agreement in terms of s.90(1) exists (tax treaty or DTAA), assesse will be governed by such tax treaty.
- This will have implications in terms of substantive tax liability under the Act for resident or non-resident assesse in respect of different incomes e.g.
- Income from immovable property
- Business profits
- Capital gains
- Dividend Income
- Interest Income
- Royalties etc.
- Additionally, such a tax treaty of DTAA will also have impact on liability of any person (whether resident or non-resident) paying to a non-resident (whether an individual or a foreign company) of deducting the tax before payment thereof in respect of payment of any interest or any other sum chargeable under the provisions of the Act (e.g. income deemed to accrue or arise in India in terms of s.9(1) of the Act)
- In terms of s.195 of the Act, at time of such payment, income tax shall be deducted at the rates in force.
- “Rates in force” in relation to an assessment year, would mean the rate prescribed in the Finance Act or concerned year or the rate prescribed in an agreement entered into by the Central Government under s.90(1) of the Act.
Thus,
- Considering the provisions of a tax treaty, if the sum otherwise chargeable under the provisions of Income Tax Act, 1961 is not chargeable so in India, no tax will be required to be deducted by the payer while paying such sum to a non-resident.
- Considering the provisions of a tax treaty, if the sum being paid to non-resident is chargeable at a rate lower than the rate prescribed under the Finance Act, deduction could be made at such lower rate of tax.
When can an assesse avail benefit of a tax treaty:-
- An assesse can avail benefit of a tax treaty if the double taxation agreement applies to such assesse. This normally could be determined looking at Article 1 and 2 of a typical DTAA.
- Article 1 typically provides for who are the persons covered (normally residents of on or both the contracting states) and
- Article 2 typically provides for which taxes are sought to be covered within ambit of the DTAA (normally taxes on income and capital)
- s.90(4) further provides that an assesse to whom an agreement referred to in s.90(1) (The DTAA or tax treaty) applies, shall not be entitled to claim any relief under such agreement unless a Tax Residency certificate is obtained by him from the government of foreign country where he is resident.
- s.90(5) provides that an assesse, for claiming benefit under a DTAA shall provide such other documents and information as may be prescribed.
Rule 21AB provides for what documents and information shall be provided in terms of s.90(5) for availing benefit under DTAA, which reads as under:-
21AB. [(1) Subject to the provisions of sub-rule (2), for the purposes of sub-section (5) of section 90 and sub-section (5) of section 90A, the following information shall be provided by an assessee in Form No. 10F, namely:—
| Status (individual, company, firm etc.) of the assessee; |
| Nationality (in case of an individual) or country or specified territory of incorporation or registration (in case of others); |
| Assessee’s tax identification number in the country or specified territory of residence and in case there is no such number, then, a unique number on the basis of which the person is identified by the Government of the country or the specified territory of which the asseessee claims to be a resident; |
| Period for which the residential status, as mentioned in the certificate referred to in sub-section (4) of section 90 or sub-section (4) of section 90A, is applicable; and |
| Address of the assessee in the country or specified territory outside India, during the period for which the certificate, as mentioned in (iv) above, is applicable. |
(2) The assesse may not be required to provide the information or any part thereof referred to in sub-rule (1) if the information or the part thereof, as the case may be, is contained in the certificate referred to in sub-section (4) of section 90 or sub-section (4) of section 90A.
(2A) The assesse shall keep and maintain such documents as are necessary to substantiate the information provided under sub-rule (1) and an income-tax authority may require the assesse to provide the said documents in relation to a claim by the said assesse of any relief under an agreement referred to in sub-section (1) of section 90 or sub-section (1) of section 90A, as the case may be.]
(3) An assesse, being a resident in India, shall, for obtaining a certificate of residence for the purposes of an agreement referred to in section 90 and section 90A, make an application in Form No. 10FA to the Assessing Officer.
(4) The Assessing Officer on receipt of an application referred to in sub-rule (3) and being satisfied in this behalf, shall issue a certificate of residence in respect of the assesse in Form No. 10FB.]
Thus, on first blush an assesse can claim a benefit under a tax treaty or DTAA if:-
- A treaty applies to him typically in terms of Article 1 and Article 2 of concerned treaty
- He has a Tax residency certificate as required under s.90(4) of the Act.
- He furnishes further particulars and documents in terms of s.90(5) as detailed under rule 21AB.
However, in terms of provisions of s.90(2) of ITA, 1961, in case of a subsisting DTAA being applicable to a particular assessee, the provisions of the act(including s.90(4) and s.90(5)) apply to the extent they are more beneficial. This will mean that if the tax treaty does not postulate for production of residency certificate and other documents/information under rule 21AB and requirements postulated in tax treaty for proving residency and availing benefit under treaty are less onerous, such less onerous requirements should only apply.
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*Above information is neither intended to be nor should it be taken as any professional advice. Please contact a legal practitioner for any specific query.