Double taxation means taxing the same income twice in the hands of an assessee. A particular income may be taxed in India in the hands of a person based on his/its residence. However, the same income may be taxed in his/its hands in the Source country also, as per the domestic laws of tax country. This gives rise to double taxation. It is a universally accepted principle that the same income should not be subject to tax twice. In order to take care of such situations, the income-tax Act, 1961 has provided for double taxation relief.
There are two types of relief from double taxation that can be provided to the assessee:
- BILATERAL RELIEF: Under this method, the governments of countries can enter into an agreement to provide relief against double taxation by mutually working out the basis on which the relief is to be granted. India has entered into agreements for relief against or avoidance of double taxation with more than 100 countries which include Sri Lanka, Switzerland, Sweden, Denmark, Japan, Federal Republic of Germany, Greece, etc.
Bilateral relief may be provided in either one of the following methods:
- Exemption Method: In this method, a particular income is taxed in only one of the two countries.
- Tax Credit Method: In this method, the income is taxable in both countries in accordance with their respective tax laws read with a double taxation avoidance agreement. However, the country of residence of the taxpayer allows him credit for the tax charged thereon in the country of source.
In India, double taxation relief is provided by a combination of the two methods.
- UNILATERAL RELIEF: This method provides for the relief of some king by the home country even when no mutual agreement has been entered into by the countries.