Double taxation means taxing the same income twice, which happens when the same item of an individual’s income is treated as accruing, arising or received in more than one country. DTAA or Double Taxation Avoidance Agreement is a treaty, which helps to overcome such perplexity by enacting rules of taxation between Source and Residential country. It is a universally accepted principle that no income should be taxed twice. Income Tax Act, 1961 serves to such principle by providing relief against double taxation under section 90 and section 91.
Types of Relief
There are two ways by which relief can be provided:
1. Bilateral relief – When the Governments of two countries enter into an agreement to provide relief against double taxation by jointly working out the system to grant it. In India, bilateral relief is provided under Section 90 and 90A of the Income-tax Act, 1961. Agreements in this kind of relief can be of two types:
- Exemption Method When two countries agree that income arising from specified sources, which are taxable in both the countries, should either be taxed in only one of them or that each of the two countries should tax only a particular specified portion of the income so that there is no overlapping.
- Tax Credit Method In this kind of agreement, single taxability is not provided but some relief is provided. The assessee is given a deduction though he is liable to have his income taxed in both the countries.
2. Unilateral relief – The relief provided by home country irrespective of any agreement with the country concerned. This kind of relief exists because bilateral agreements might not be sufficient to meet all the cases. In India, Section 91 of the Income Tax Act, 1961 provides such relief. In other words, where Section 90 does not apply for relief under Section 91 will be available. Unilateral relief is only available in respect to doubly taxed income that is part of income which is included in assessee’s total income.