Tax Treaties: Case Studies on Unilateral and Bilateral Reliefs

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Tax Treaties

Executive Summary

The concept of double taxes arises as tax is charged on both, on basis of residential status of the assessee as well as on the basis of source of income of the assessee.

There could be mitigation of double taxes as per Double Taxation Avoidance Agreement (DTAA), if such agreement exists between India and the other country in which income has been taxed doubly. In such cases relief for doubly taxed income is given on the basis of either “Tax Credit clause” or “Exemption clause” or any other clause as mentioned in the DTAA between two countries with respect to that specific income.

In Indian scenario, these DTAAs are permitted to be entered into as per provisions of section 90/90A of Income-tax Act, 1961.

In case DTAA does not exist between India and other country’s Government from which there is doubly taxed income, then tax is mitigated/relief is availed as per section 91 of Income-tax Act which deals with “Unilateral Relief”. As per section 91 of Income-tax Act, such relief is to the extent of lower of the following:—

          (a)  Doubly taxed Income × Indian rate of tax; or;

          (b)  Doubly Taxed Income × Foreign rate of tax

NOTE: As per new section 115BAC inserted by Finance Act, 2020, an individual can compute tax liability either as per normal rates of tax OR; he may opt for ALTERNATIVE TAX rates. However, if he opts for ALTERNATIVE TAX RATES, he cannot claim multiple allowances and deductions including deductions of Chapter VI-A (Except few).

FAQ 1. An Indian company has the following incomes are noted from its books of account:

Income from a business in India: ` 3,80,000

Income from business in a Foreign country with whom India has a DTAA: ` 2,16,000

According to the DTAA, ` 2,16,000 is taxable in India. However, it can also be taxed in foreign country @ 11.85% which can be set off against Indian Tax liability.

What is the Indian Tax liability?

Ans:

(Computation of net tax payable for Assessment Year) 2022-23 (Relevant to Previous Year 2021-22)

Sr. No. Particulars Amount (` ) Amount (` )
A. Income from Business in India 3,80,000
B. Income from business in foreign country (Taxable in India as Reddy India Ltd. is Resident in India being Indian Co.) 2,16,000
Total Income 5,96,000
Tax on above @ 25% (Assuming that Turnover in PY 2018-19 did not exceed ` 400 crores) 5,96,000 × 25% 1,49,000
Add: H&EC @4% 5,960 1,54,960
Less: Relief u/s 90 i.e. As per DTAA, to the extent of tax paid on ` 2,16,000 in foreign country (2,16,000 × 11.85%) (25,596)
Net Tax liability 1,29,364
Rounded off to nearest of ` 10 u/s 288B 1,29,360

FAQ 2. An individual, aged 64 years, is resident in India. His income is ` 16,80,000 from a business in India and ` 5,45,000 from business in foreign country with whom India has agreement for avoidance of double taxation (ADT).

According to the DTAA, income is taxable in the country in which it is earned and not in other country. However, in the other country, such income can be included for computation of tax rate. According to the tax laws of foreign country, the individual paid ` 32,000 as tax in that country.

During the previous year, the individual has paid ` 28,000 as tuition fee for his daughter in India and ` 90,000 as tuition fee for his son outside India for full time education. The individual has also received an interest of ` 48,000 on Government Securities. What is the Tax Liability?

Ans:

Computation of Tax Liability for Assessment
Year 2022-23 (Relevant to Previous Year 2021-22)

Particulars Amount (`) Amount (`)
A. Profits and Gains from Business or Profession in India 16,80,000
B. Income from other Sources (Interest on Government Securities) 48,000
Gross Total Income 17,28,000
Less: Deduction under Chapter VIA
u/s 80C: Tuition Fees of daughter, education in India 28,000
Total Income 17,00,000
Add: Foreign Income only for computing effective rate of tax as per DTAA 5,45,000
Total Income for computing effective rate of tax 22,45,000
Effective rate of Tax
Tax on ` 22,45,000
` 0-3 lacs (Being Resident Senior Citizen as age 60 or more than 60 in the PY) –
` 3 to 5 lacs, Tax @5% 10,000
` 5 lacs to 10 lacs @ 20% 1,00,000
Above ` 10 lacs @ 30% (12,45,000 × 30/100) 3,73,500
4,83,500
Add: H&EC @ 4% 19,340
5,02,840
Therefore, effective rate of tax (5,02,840/22,45,000 × 100)% 22.3982
Therefore, Tax liability in India on ` 17,00,000 (17,00,000 × 22.3982/100) 3,80,769
Rounded off to nearest of ` 10 u/s 288B 3,80,770
Relief (For your understanding)
Tax payable if there was no DTAA 5,02,840
Tax payable considering clause in DTAA 3,80,770
Relief as per DTAA AS PER GIVEN CLAUSE 1,22,070

FAQ 3. An individual  resident of India, receives the following payments after TDS during the previous year 2021-22:

Professional Fees on 17-8-2021: ` 2,40,000

Professional Fees on 4-3-2022: ` 1,60,000

Both the above services were rendered in Pakistan on which TDS of ` 50,000 and ` 30,000 respectively has been deducted. He had incurred an expenditure of ` 2,40,000 for earning both these receipts incomes. His income from other sources in India is ` 3,00,000.

What is the tax liability and also relief under section 91, if any, for Assessment Year 2022-23?

Ans:

Computation of Tax liability for Assessment Year 2022-23

(Relevant to Previous Year 2021-22):

Particulars Amount (`) Amount (`)
     a.   Gross Income from Pakistan

          (Net Received + TDS)

 4,80,000
Less: Deductions w.r.t. Expenditures incurred to earn this income 2,40,000 2,40,000
     b.   Indian Income 3,00,000
Gross Total Income/Total Income 5,40,000
Tax
2.5 lacs to 5,00,000, Tax @ 5% 12,500
5 lacs to 10 lacs, Tax @ 20% 8,000
Total 20,500  –
Add: Health & Education Cess @ 4% 820 21,320
Less: Relief u/s 91 of Income-tax Act
Lower of 2
Doubly Taxed Income × Indian Rate of Tax

(2,40,000 × 3.9481%)

 9,475
Doubly Taxed Income × Foreign Rate of Tax

(2,40,000×16.6667%)

 40,000
Relief u/s 91 9,475
Net Tax liability 11,845
Rounded off to nearest of ` 10 u/s 288B   11,850
Working Notes: %
Indian Rate of Tax (21,320/5,40,000 × 100) 3.9481
Foreign Rate of Tax Total TDS/Total Income in
foreign × 100(80,000/4,80,000 × 100)		 16.6667

FAQ 4. A resident Indian has derived the following income:

(a)  Income from Profession: ` 4,80,000

(b)  Share income from a partnership firm in country M (Tax paid in country M for this income in equivalent Indian ` 10,000): ` 50,000

(c)  Commission income from a concern in country N (Tax paid in country N @ 20%) converted in Indian ` 35,000.

(d)  Interest from scheduled banks: ` 18,000

Whether the individual is eligible to any double taxation relief and if so, its quantum? India does not have any double taxation Avoidance Agreement with Country M & Country N.

Ans:

Computation of Tax liability for Assessment Year 2022-23

(Relevant to Previous Year 2021-22)

Particulars Amount (`) Amount (`)
A Income from profession 4,80,000
B Income from other Sources (Interest from Scheduled Banks) 18,000
Share Income from Partnership Firm in Country M 50,000
C Commission FROM CONCERN IN Country N 35,000
D Gross Total Income/Total Income 5,83,000
E Tax Liability
On Income upto ` 2,50,000 –
On Income Between ` 2.5 lacs to ` 5,00,000 @ 5% 12,500
On Income Between ` 5 lacs to ` 10,00,000 @ 20% 16,600
29,100
Add: H & EC @ 4% 1,164 30,264
F Less: Relief u/s 91 of Income-tax Act w.r.t. Unilateral relief
w.r.t. Income from Country M
Doubly Taxed Income from M × Indian rate of tax

(` 50,000 × 5.1911%) or;

 2,596
Doubly Taxed Income × Foreign rate of tax of Country M

(` 50,000 × 20%)

 10,000
Relief 2,596
w.r.t. Country N
(` 35,000 × 5.1911%) or; 1,817
(` 35,000 × 20%) 7,000
Relief 1,817
Therefore, Tax liability 25,851
Rounded off to nearest of ` 10 u/s 288B 25,850
Working Note:
Indian Rate of Tax (` 30,264/` 5,83,000 × 100)  5.1911
Foreign Rate of Tax w.r.t. Country M (` 10,000/` 50,000 × 100)  20.00

FAQ 5. An individual, aged 66 years and ordinary resident in India, is a professional. He has earned ` 1,00,000 from services provided outside India.

His foreign income was taxed at 20% in that country where services were rendered. India does not have any tax treaty with that country.

Assuming that Indian income of the individual is ` 6,00,000, what relief of tax under section 91 of the Income-tax Act, 1961 will be allowed to him? He has contributed ` 32,000 towards PPF.

Ans:

Computation of Tax liability of Mr. Paresh for
Assessment Year 2022-23

(Relevant to Previous Year 2021-22)

Particulars Amount (`) Amount (`)
Foreign Income 1,00,000
Indian Income 6,00,000
Gross Total Income 7,00,000
Less: deductions under Chapter VI-A u/s 80C (Deposit in PPF) 32,000
Total Income 6,68,000
Tax
0-3 lacs (No Tax being Resident Senior Citizen) –
3 lacs to ` 5,00,000 10,000
` 5 lakhs to ` 10,00,000, Tax @ 20%

(` 6,68,000 – ` 5,00,000) × 20%

 33,600
Sub-Total 43,600
Add: H & EC @ 4% 1,744 45,344
Less: Relief u/s 91
Lower of the following
Doubly Taxed Income × Indian Rate of Tax

(` 1,00,000 × 6.7880%)

 6,788
Doubly Taxed Income × Foreign Rate of Tax (` 1,00,000 × 20%) 20,000
Therefore, Relief u/s 91 6,788
Net Tax liability   38,556
Rounded off to nearest of ` 10 u/s 288B 38,560
Working Notes:
1 Indian Rate of Tax (` 45,344/` 6,68,000 × 100) 6.78
2 Foreign Rate of Tax 20.00

FAQ 6. An individual and citizen of India received remuneration from a foreign client in the previous year 2021-22. There is no DTAA with that country. The remuneration was ` 60,00,000 and ` 12,00,000 was tax imposed by that country. Income from other sources in India is ` 9,50,000. The individual has deposited ` 1,00,000 in PPF in the previous year 2021-22.

What is tax relief available in India, if the individual brings ` 48,00,000 in India in convertible foreign exchange?

Ans:

Computation of tax liability or Assessment Year 2022-23 (Relevant to Previous Year 2021-22):

Sr. No. Particulars Amount (`) Amount (`)
  Foreign Income  60,00,000
  Indian Income  9,50,000
  Gross Total Income  69,50,000
  Deduction u/s 80C  1,00,000
  Total Income  68,50,000
  Tax Liability
  a. On Income upto ` 2,50,000  –
  b. On Income between ` 2.5 lacs to 5 lacs  12,500.00
  c. On income between ` 5 lacs to 10 lacs  1,00,000
  d. On Income above ` 10 lacs @ 30%  17,55,000
   18,67,500
  Add: Surcharge @ 10% as Total Income exceeds
  ` 50 lacs but does not exceed ` 1 crore  1,86,750
  Sub-Total  20,54,250
  Add: H&E @ 4% of Sub-Total  82,170  21,36,420
  Less: Relief u/s 91 of Income-tax Act i.e.
  Unilateral Relief
  Lower of 2:
a. Doubly Taxed Income × Indian Rate of Tax
  ` 60,00,000 × 31.1886%  18,71,316
 
b. Doubly Taxed income × Foreign rate of tax
  ` 60,00,000 × 20%  12,00,000
 
  Therefore, Relief u/s 91  12,00,000
  Net Tax Liability  9,36,420
  Rounded off to nearest of ` 10 u/s 288B  9,36,420
  Working Notes %
 
  Indian Rate of Tax  31.1886
  (` 21,36,420/` 68,50,000 × 100)
 
  Foreign Rate of Tax  20.00
  (` 12,00,000/` 60,00,000)

FAQ 7. A resident of India has the following incomes during the previous year 2021-22:

Income from Textiles business in India: ` 7,30,000

Income from Garments business in Canada (with which India does not have DTAA): ` 2,40,000

Tax Levied in Canada on the above said income: ` 54,000

Purchase of NSC issue: ` 70,000

What is the Tax Liability?

Ans:

Computation of Tax liability for Assessment Year 2022-23

(Relevant to Previous Year 2021-22)

Particulars  Amount (`)  Amount (`)
A. Indian Income 7,30,000
B. Foreign Income 2,40,000
C. Gross Total Income 9,70,000
D. Less: Deduction under Chapter VI-A
u/s 80C (NSC) 70,000
Total Income 9,00,000
Tax Liability
On Income upto ` 2,50,000  –
On Income between ` 2.5 lacs to ` 5 lacs 12,500
On Income between ` 5 lacs to ` 9 lacs 80,000
Total  92,500
Add: H& EC @ 4%  3,700 96,200
Less: Relief u/s 91 of Income-tax Act
Lower of the following
     a.   Doubly Taxed Income

× Indian Rate of Tax (2,40,000 × 10.6889%)

 25,653
     b.   Doubly Taxed Income

× Foreign rate of Tax (2,40,000 × 22.5%)

 54,000
Relief u/s 91 25,653
Net Tax liability 70,547
Rounded off to nearest of ` 10 u/s 288B 70,550
Working Notes:
Indian Rate of Tax
` 96,200/` 9,00,000 × 100  10.6889
Foreign Rate of Tax
` 54,000/` 240,000 × 100  22.50

FAQ 8. A resident individual, is a freelancer dancer deriving income of ` 75,000 from shows performed outside India. Tax of ` 10,000 was deducted at source in the country where the shows were performed. India does not have any DTAA with that country.

The individual’s income in India amounted to ` 3,00,000. What is the tax liability for the assessment Year 2022-23 assuming the individual has deposited ` 10,000 in Public Provident Fund and paid ` 20,000 as medical insurance premium in respect of her father (Age 65 years)?

Ans:

Computation of Tax liability for Assessment Year 2022-23

(Relevant to Previous Year 2021-22)

Particulars Amount (`) Amount (`)
A Foreign Income  75,000
B Indian Income 3,00,000
C Gross Total Income 3,75,000
D Less: Deductions under Chapter VI-A
u/s 80C (PPF)  10,000
u/s 80D (Mediclaim)  20,000  30,000
E Total Income 45,000
Tax Liability
0-2.5 lakhs  –
2.5 lakhs to 5 lakhs, Tax @ 5%  4,750
(3,45,000 – 2,50,000) × 5%
Total  4,750
Less: Rebate to the extent of ` 5,000 or Tax liability, whichever is less as TI does not exceed ` 5,000 for resident individual 4,750
Add: H & EC @ 4%

 Note: Since No Tax is payable in India, there is no question of claiming relief u/s 91 of Income-tax Act.

FAQ 9. The following are the particulars of Income earned by a resident Indian aged 25 years, for the assessment year 2022-23:

Particulars Amount (`)
Income from playing basketball match in Netherland 12,00,000
Tax paid in Netherland  1,80,000
Income from playing Basketball match in India 19,20,000
Life insurance premium paid  1,20,000
Medical insurance premium paid through net banking for her father aged 62 years  25,000

 

What is the total income and tax liability for the assessment year 2022-23, assuming there is no Double Taxation Avoidance Agreement between India and Netherland.

Ans:

Computation of Tax Liability for Assessment Year 2022-23

(Relevant to Previous Year 2021-22)

Particulars Amount (`) Amount (`)
Income from playing basketball matches in foreign country  12,00,000
Income from playing basketball matches in India 19,20,000
Gross Total Income   31,20,000
Less: Deductions under Chapter VI-A
u/s 80C (Life Insurance Premium)  1,20,000
u/s 80D (Mediclaim for father who is Senior Citizen, therefore ` 25,000 or ` 50,000 whichever is less) 25,000 1,45,000
Total Income   29,75,000
Tax on Above
` 0-2.5 lacs  –
` 2.5 lacs to 5 lacs, tax @ 5% 12,500
` 5 lacs to 10 lacs, tax @ 20% 1,00,000
On income above ` 10 lacs, tax @ 30% 5,92,500
 7,05,000
Add: H&EC @ 4% of tax 28,200 7,33,200
Less: Relief u/s 91 w.r.t. doubly taxed income
Lower of the following:
     a.   Doubly Taxed Income

× Indian rate of tax (` 12,00,000 × 24.6454%)

 2,95,745
          or;
     b.   Doubly Taxed Income

× Foreign rate of tax

(` 1200000 × 15%)

 1,80,000
Therefore, relief u/s 91 1,80,000
Therefore, Tax liability   5,53,200
Working Notes
1 Indian rate of Tax

(` 7,33,200/` 29,75,000 × 100)

  24.6454
2 Foreign Rate of Tax  15.00

FAQ 10. An individual resident and citizen of India, earned remuneration in the foreign currency from an enterprise in foreign country during her stay in that country in the previous year 2021-22. There is no DTAA with that country. The remuneration was ` 8,00,000 and ` 1,60,000 was deducted at source by the enterprise. Income from other sources in India was ` 2,00,000.

What is the relief available u/s 91 assuming that the indivual brings ` 3,00,000 in India in convertible foreign exchange by 30th September, 2021?

Ans:

Computation of Tax liability for Assessment Year 2022-23

(Relevant to Previous Year 2021-22)

Particulars Amount (`) Amount (`)
A. Foreign Income 8,00,000
B. Indian Income 2,00,000
C. Gross Total Income/Total Income 10,00,000
Tax Liability    
     a.   On Income upto ` 2,50,000  –  
     b.   On Income between ` 2.5 lacs to ` 5 lacs 12,500  
     c.   On Income between ` 5 lacs to ` 10 lacs 1,00,000  
1,12,500  
Add: H & EC @ 4% 4,500 1,17,000
Less: Relief under section 91    
Lower of the following:    
     a.   Doubly Taxed Income × Indian Rate of Tax

(` 8,00,000 × 11.70)

 93,600  
     b.   Doubly Taxed Income × Foreign rate of tax (` 8,00,000 × 20%) 1,60,000  
Relief u/s 91   93,600
Net Tax Liability   23,400
Rounded off to nearest of ` 10 u/s 288B   23,400
Working Notes:    
Indian Rate of Tax

(` 1,17,000/` 10,00,000 × 100)

  11.70
Foreign Rate of Tax

(` 1,60,000/` 8,00,000 × 100)

  20.00

FAQ 11. A resident Indian is doing business in India and abroad. During the previous year 2021-22, he disclosed the following information:

Figures in `
Income from business in India 27,00,000
Income from business in country A with which India does not have
Agreement for avoidance of double taxation 15,00,000
Income Tax levied by Government in country A 5,00,000
Loss from business in country B with which also India does not have
Agreement for avoidance of double taxation (4,00,000)
Contribution to Public Provident Fund 1,50,000
Payment of Life Insurance Premium on the life of his father and Mother 20,000

 

What is the tax liability for the Assessment Year 2022-23?

Ans:

Computation of Tax liability for Assessment Year 2022-23

(Relevant to Previous Year 2021-22)

Particulars Amount (`) Amount (`)
Income from business in India 27,00,000
Income from Foreign Country A 15,00,000
Loss from foreign Country B being set off -4,00,000
Gross Total Income 38,00,000

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