BAJAJ BROKING
February 19, 2025
7 mins read
Double taxation takes place when the same income gets taxed twice. That is not something that taxpayers are keen on paying for. There are two ways in which double taxation can occur. Juridical Double Taxation happens when taxpayers earn money outside India and get taxed abroad and in India. Essentially here, taxpayers are paying tax in two different countries. The second one is Economic Double Taxation where the same income is taxed twice in the same country, with different entities or individuals.
Here is everything you need to know about double taxation
As previously defined, double taxation happens when the same income gets taxed twice, which is common in the corporate world. When corporations pay taxes on their profits which are then distributed as dividends, shareholders also pay taxes on that income. This means that the same money is being taxed twice:
At the corporate level and
At the individual level.
Other than this, when businesses or individuals end up paying taxes on the same income in two different countries, that is also known as double taxation. This is far from ideal for any taxpayer.
There are two major types of double taxation:
Corporate Double Taxation
This is where the profits of a corporation are taxed in the first step and the dividends distributed through the profits are also taxed in the next step.
International Double Taxation
International Double Taxation involves the taxation of foreign income first in the country where it was earned and second, in the country in which the taxpayer resides.
Double taxation can add a lot of unnecessary financial strain to taxpayers. The good news, however, is that they can apply for relief from double taxation under Sections 90, 90A, and 91 of the Income Tax Act. This can stop taxpayers from paying taxes twice on their income. This relief can be requested both domestically and internationally.
The following ways can be used to request relief from double taxation:
When India and a foreign country have signed a Double Taxation Avoidance Agreement (DTAA), taxpayers can request tax relief under Section 90.
When the DTAA is with a particular association or organisation, then tax relief can be availed under Section 90A.
Even if no DTAA exists between India and a foreign country, taxpayers can claim tax relief under Section 91.
There are two main ways you can get relief from double taxation:
Bilateral Tax Relief:
When India and another country have a DTAA, the tax relief for taxpayers is calculated using either of the two methods listed below:
Exemption Method – In this method, a taxpayer’s income is taxed only in one country.
Tax Credit Method – Under this method, though the income is taxed in both countries, taxpayers get a tax credit in their home country. This reduces the overall burden.
Unilateral Tax Relief:
When no DTAA exists between two countries, the taxpayer’s home country may provide tax relief to prevent double taxation.
Here are a few ways through which relief can take place for corporate double taxation.
Legislative Provision
With double taxation in place, inefficiency increases and it also deters investment. This is why legislation must be passed to eliminate it. When investors can obtain their dividends tax-free, they will be more likely to invest money. This can be especially beneficial for established businesses that have low capital requirements.
Pass-Through Taxation
When businesses structure themselves as an LLC, partnership, or sole proprietorship, double taxation can be avoided. Such business structures use pass-through taxation, where the company doesn’t pay taxes on profits but passes the income through to the owners, who pay taxes on their shares. This method works better for small businesses but might not be feasible for larger corporations.
Absence of Dividend Distribution
The next approach involves companies keeping profits within the company and not distributing them as dividends. This strategy is ideal for start-ups and growing businesses that require capital to fund their expansion and for companies that want to increase their market share. This method, however, might not work great for established companies as investors often expect dividend payouts from them.
Personal Income Tax Classification
The last method through which corporations can avoid double taxation is by classifying shareholders as employees or executive directors and paying them a salary. Granted that the individuals would still pay personal income tax on their earnings, it won’t count as double taxation.
The problem of international double taxation can be solved through tax treaties between countries and legal systems. With the help of such agreements, nations can work better together when they share and cooperate on tax matters. These treaties reduce unfair taxation, make international trade efficient, help prevent tax evasion and provide clarity to taxpayers. These treaties also help countries shield businesses and individuals from paying taxes twice on the same income.
To understand how to get double taxation relief in India and abroad it is important to understand what Double Taxation Avoidance Agreements (DTAA) are. The DTAA is a deal made between two countries to prevent or reduce double taxation on the same income. Without the DTAA, individuals and corporations might have to pay taxes twice, once in the income-earning country and the second time in the home country.
With a DTAA in place, the potential harm that double taxation can cause global trade can be nullified. From boosting cross-border trade, encouraging foreign investment, preventing tax evasion and making sure fair taxation practices are established, DTAA plays a crucial role.
DTAAs outline rules regarding the taxation of income from international transactions. Under the DTAA, an investor is taxed only in their home country making the income exempt from tax in the it was earned. Another way is in which the investor’s income is taxed in the income-generating country but they get a tax credit in their home country so that they don’t pay tax twice.
Listed below are some of the nations with whom India has DTAA agreements:
United States of America
United Kingdom
Ukraine
UAE
Thailand
Sweden
South Africa
Saudi Arabia
Italy
Japan
China
Australia
For taxpayers who have no inclination to pay tax twice, Section 90 of the Income Tax can act as a true saviour. Under this section, taxpayers paying taxes both in India and abroad can have the issue sorted or good. The Indian government signed a DTAA agreement with other countries to help provide tax relief when corporations and individuals are taxed twice.
The agreement works in the following circumstances:
When income is taxed under both the Income Tax Act of 1961 and the tax laws of another country.
When tax is imposed under the Income Tax Act 1961 and according to the designated legislation that is effective in that particular country.
To prevent the double taxation of income under the IT Act 1961 and the local law.
To allow tax authorities to recover outstanding taxes across borders.
Relief under Section 90 of the Income Tax Act can only be opted for by residents of countries that have signed a tax treaty with India. In case you are a resident of another country and want to claim tax relief in India, a Tax Residence Certificate (TRC) from your home country's government would be needed.
Double taxation is the process by which one income is taxed twice; one in the income-earning country and the second in the home country. However, this can be a major hassle for investors and businesses. The good news is that one can opt for Double Taxation Relief under special provisions which have all been discussed above. These methods will lower an investor’s tax liability and encourage investments globally.
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Double taxation can hurt small businesses as they are still on the growth path and need all the capital to help them expand.
This will apply if the income is received from foreign entities.
Failure to address double taxation in international transactions can lead to excessive tax burdens, reduced profitability, legal disputes, non-compliance penalties, strained diplomatic relations, and potential double taxation avoidance agreement (DTAA) violations.
Yes, salaried individuals often get relief through DTAA via employer deductions, while freelancers must claim foreign tax credit individually, ensuring compliance with tax treaties and local tax regulations.
This could lead to the income of an individual being taxed twice. One in the country of residence and the other in the country where the income is earned.
Corporations are more prone to double taxation issues.
The following documents are required to claim relief under a DTAA:
Tax Residency Certificate
An indemnity or self-declaration form
Self-attested copy of PAN card
Self-attested visa
PIO proof copy to validate that you are of Indian origin
Passport xerox(self-attested)
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