Relief u/s 90 & 91
Relief Under Section 90 and 91: Avoiding Double Taxation
In this post, We will discuss double taxation relief under Sections 90 and 91 of the Income Tax Act. We’ll look at how tax treaties and unilateral relief help people avoid paying taxes twice on the same income, as well as crucial rules, calculations, and examples to help understand the process.
Let’s look at each section in detail:
- Types of Double Tax Relief under Sections 90 and 91
- What is Section 90 of the Income Tax Act
- What is Section 90A?
- Relief under Sections 90 and 90A
- What is Section 91 of the Income Tax Act?
- Relief under section 91
- Difference between Double Taxation Relief and Double Taxation Avoidance
- Calculation of Foreign Tax Credit
- Penalties for non-disclosing of Foreign Income
- FAQs
Types of Double Tax Relief under Sections 90 and 91
To avoid double taxation, there are two significant types of relief:
- Bilateral Relief: This is applicable when two countries have a Double Taxation Avoidance Agreement (DTAA). This relief has two methods: exemption and credit.
- Unilateral Relief: If there is no tax agreement between the home country and the resident country, the home country offers relief to avoid double taxation. This is addressed in full in Section 91.
What is Section 90 of the Income Tax Act
When a Double Taxation Avoidance Agreement (DTAA) is in place, Section 90 of the Income Tax Act applies. Its goal is to prevent people from being taxed twice on the same income while working for a foreign company.
When someone works in a foreign nation or an expatriate works in India, the DTAA ensures that the same income is not taxed in both countries simultaneously. Under this arrangement, both countries assist in the form of international tax credits or exemptions, ensuring that taxes are only deducted once.
What is Section 90A?
Section 90A applies when a tax treaty (DTAA) is signed between specific organizations or associations in India and a foreign country rather than between the two countries. In such cases, tax relief can be obtained under this section.
The process under Section 90A is quite similar to Section 90, with the main distinction being that the agreement is between institutions or associations rather than between the governments of the two nations.
Relief under Section 90 and 90A
Tax reduction under this clause is only accessible to Indian residents if India has a Double Taxation Avoidance Agreement (DTAA) with the nation or association from where the income was received. If a DTAA with the foreign country, relief can be claimed under Section 90. If the DTAA is with a specific association, relief is available under Section 90A.
Under these DTAAs, the Indian and foreign governments may agree to one or more of the following:
1.Providing relief for income taxed under both the Income Tax Act and the other country’s tax laws.
2.Preventing double taxation of income under both countries’ tax laws.
3.Exchanging information and data by:
a. Prevent tax evasion or avoidance under the tax rules of either country
b. Investigate cases of tax evasion or avoidance or
c. Assist in the recovery of taxes under both nations’ tax laws.
If a bilateral agreement is in effect, the taxpayer can choose to be taxed under the DTAA or the regular provisions of the Income Tax Act, depending on which is more beneficial.
What is Section 91 of the Income Tax Act?
Individuals may seek tax relief under Section 91 of the Income Tax Act if India and another country do not have a Double Taxation Avoidance Agreement (DTAA). While India has DTAAs with more than 94 countries, Section 91 exempts income earned in countries without such agreements.
Unilateral relief applies in the absence of a DTAA. This means that if a person pays taxes on the same income in two nations, they can seek relief based on the lower tax rate of the two. This helps to avoid double taxation.
Relief under section 91
Section 91 of the Income Tax Act provides relief to Indian residents who earn income from countries with which India does not have a Double Taxation Avoidance Agreement (DTAA). India unilaterally provides this benefit to avoid double taxation in such cases.
Key Conditions for Claiming Relief:
- Income Source: The previous financial year’s income must have come from a foreign country.
- Tax Liability: Income must be taxable in India and the other country.
- No DTAA: India should not have a Double Taxation Avoidance Agreement with the country where the income was earned.
- Tax Payment: You must have previously paid taxes on this income in another country.
- Relief Calculation: The relief amount is the smaller of the Tax paid in the foreign country and the Tax due in India on that income. This amount is then subtracted from your total Indian tax liability.
Points to remember:
- If a DTAA exists with the other country, you can’t apply for relief under Section 91. Instead, you have to use the DTAA provisions to avoid double taxes.
- Even if a DTAA exists and you choose not to use its advantages, you cannot apply for relief under Section 91. DTAA requirements take priority in such situations.
How to Claim Relief:
To get unilateral relief under Section 91, you must file your Indian income tax return and provide proof of tax payment (e.g:- a tax certificate) from the foreign tax authority.
In short, Section 91 relief is only available when there is no DTAA between India and the other country. If a DTAA exists, you must use its provisions to avoid double taxation, even if you have no plans to claim its benefits.
Difference between Double Taxation Relief and Double Taxation Avoidance
Here’s a short explanation of the difference between double taxation relief and avoidance:
Double Taxation Relief:
- Tax benefits are provided through bilateral agreements or through one country’s own laws (unilateral).
- Relief can be offered in two ways: the exemption method (income is taxed only in one nation) and the credit method (tax paid in one country is deducted in another).
- Relief can be claimed in India under Sections 90, 90A, and 91 of the Income Tax Act, even if no official agreement (DTAA) exists with the foreign country.
Double Taxation Avoidance:
- This occurs when India and another country sign a particular agreement (DTAA) to avoid double taxation.
- The deal ensures that the same income is not taxed twice in both nations, resulting in tax relief.
- In India, this is covered by Sections 90 and 90A of the Income Tax Act.
In short, relief is about decreasing double taxation through different methods. In contrast, avoidance is about preventing it through formal agreements between countries.
Calculation of Foreign Tax Credit
When claiming a Foreign Tax Credit, it is calculated separately for each type of abroad income. The credit available will be the lower of:
- The tax due on that income under Indian tax laws.
- Actual tax paid in a foreign country.
To convert international tax amounts to Indian currency, the Telegraphic Transfer Buying Rate (TTBR) from the last day of the month preceding the tax payment or deduction would be applied.
Relief Under Section 90 (Tax Treaty Countries)
If India has a tax treaty with a foreign country, the relief is calculated as follows:
- Calculate Total Income by adding both Indian and foreign income.
- Determine Indian Tax by computing the total tax on this income based on Indian tax laws.
- Find the Average Tax Rate by dividing the total tax by total income to get the tax rate as a percentage.
- Calculate Indian Tax on Foreign Income by multiplying the foreign income by the average tax rate.
- Compare this with foreign tax paid and allow relief based on the lower amount between the tax calculated in Step 4 and the actual tax paid abroad.
Example:
- Mr. A earns ₹2,00,000 in India and ₹3,00,000 in the USA, where he paid ₹20,000 in foreign tax.
- Total income = ₹5,00,000
- Tax in India = ₹12,500
- Average tax rate = 2.5% (12,500 ÷ 5,00,000 × 100)
- Indian tax on foreign income = ₹7,500 (3,00,000 × 2.5%)
Since ₹7,500 is lower than ₹20,000, ₹7,500 is the relief Mr. A can claim.
Relief Under Section 91 (No Tax Treaty Countries)
If no tax treaty exists, relief is calculated as follows:
- Compute Indian Tax on Foreign Income based on applicable Indian tax laws.
- Compare Tax Rates by identifying the lower rate between Indian and foreign tax.
- Apply the Lower Tax Rate to the foreign income to determine the final relief.
Example:
- Mr. X has ₹2,00,000in foreign income.
- Indian tax rate = 30% that is tax payable in India = ₹60,000
- Foreign tax rate = 20%
- Lower rate = 20%, so relief = ₹40,000 (2,00,000 × 20%)
Thus, Mr. X can claim a relief of ₹40,000 under Section 91.
Penalties for non-disclosing of Foreign Income
The following is a simplified and modified version of the tax penalty rules:
- Default in Tax Payment: The tax authorities will determine the penalty if you fail to pay your taxes. But the penalty will be limited to the total amount of tax you have to pay.
- Under-Reporting Income: If you declare less income than the tax authorities decide, you will be fined 50% of the tax payable on the under-reported amount.
- Failure to Maintain Records: If you do not keep correct financial records, you will often be fined Rs. 25,000. If foreign transactions are involved, the penalty is increased to 2% of the total value of the transactions.
- Fake Documents: If the tax authorities discover fake invoices or documents in your records-such as invoices for products or services that were never delivered or from non-existent entities-or if you omit major transactions, you may face a penalty equal to the value of the false or omitted entries.
- Not Filing a Tax Return: If you don’t file your income tax return, you will be fined Rs. 5,000.
And with that, we conclude this post. Please leave any questions or comments in the space below; we are happy to answer them.
FAQs
1. What is the Form 10F under Section 90 of the Income Tax Act?
Ans: Non-residents claiming tax relief under the DTAA must file Form 10F.
2. What type of benefit does Section 91 of the Income Tax Act of 1961 provide?
Ans: Section 91 of the Income Tax Act of 1961 offers unilateral relief from double taxation. It applies if you paid income tax in a foreign country with which India does not have an active double taxation agreement.
3. What is the difference between Sections 90 and 90A of the Income Tax Act of 1961?
Ans: Section 90 of the Income Tax Act applies when two countries have a double-taxation treaty. Section 90A of the Income Tax Act, on the other hand, applies when there is a DTAA between two separate organizations or associations from different nations.
4. How does the DTAA benefit taxpayers?
Ans: DTAA helps taxpayers in avoiding double taxation by offering relief mechanisms such as exemptions or credits, which ensure that they do not pay taxes on the same income in both their home and source countries.
