Section 90 of the Income Tax Act
Section 90 of the Income Tax Act: Relief from Double Taxation
In a globally connected world, individuals and businesses often earn income from multiple countries. This international income can lead to a situation where the same income is taxed by more than one country, resulting in what’s known as double taxation. To prevent this, India has established various mechanisms under the Income Tax Act of 1961. One of the key provisions designed to address this issue is Section 90, which pertains to the Double Taxation Avoidance Agreements (DTAAs) that India has signed with other countries. This article provides a detailed overview of Section 90 of the Income Tax Act, exploring its purpose, application, and benefits.
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What is Section 90 of the Income Tax Act?
Section 90 of the Income Tax Act provides relief from double taxation by allowing Indian residents to claim a credit for taxes paid in a foreign country or by exempting certain incomes from taxation in India. The section comes into play when there is a Double Taxation Avoidance Agreement (DTAA) between India and another country. These agreements are designed to ensure that taxpayers do not end up paying tax on the same income in both countries, which can otherwise create a significant financial burden.
Also, read our guide – Double Taxation Relief – Sections 90, 90A, and 91 of the Income Tax Act
Purpose of Section 90
The primary purpose of Section 90 is to mitigate the risk of double taxation, thereby encouraging cross-border trade and investment. By eliminating the possibility of being taxed twice on the same income, Section 90 promotes international economic cooperation and makes it easier for businesses and individuals to engage in international transactions.
Key Provisions of Section 90 of the Income Tax Act
- Relief Methods Under DTAA: Section 90 outlines two main methods through which relief from double taxation can be provided:
- Exemption Method: Under this method, income that has already been taxed in one country is exempted from tax in the other country. This method ensures that the taxpayer does not pay tax on the same income in both countries.
- Credit Method: In this method, the tax paid in one country is credited against the tax liability in the other country on the same income. This reduces the overall tax liability by allowing the taxpayer to offset the foreign tax against the domestic tax.
- Applicability: Section 90 applies to individuals and entities that are residents of India and have earned income from a country with which India has a DTAA. The section is applicable to various forms of income, including salaries, business profits, dividends, interest, royalties, and capital gains.
- Determining Residency: One of the critical aspects of applying Section 90 is determining the residency of the taxpayer. The DTAA typically includes a “tie-breaker” rule that helps determine which country has the right to tax the individual in cases where the taxpayer could be considered a resident of both countries.
- Mutual Agreement Procedure (MAP): Section 90 also provides for a Mutual Agreement Procedure (MAP), which is a dispute resolution mechanism under the DTAA. If a taxpayer believes that the actions of one or both of the contracting countries result in taxation not in accordance with the DTAA, they can seek resolution through MAP. This procedure allows the competent authorities of the two countries to communicate and resolve the issue in a fair and impartial manner.
How to Claim Relief Under Section 90 of the Income Tax Act
To claim relief under Section 90, taxpayers must follow a specific process:
- Obtain a Tax Residency Certificate (TRC): The taxpayer must obtain a Tax Residency Certificate (TRC) from the tax authorities of the country where they are a resident. This certificate is essential to prove residency and eligibility for claiming relief under the DTAA.
- File Form 67: The taxpayer must file Form 67 along with their income tax return. This form provides details of the foreign income and the taxes paid in the foreign country. It also includes information on the relief claimed under the DTAA.
- Submit Necessary Documentation: The taxpayer must submit supporting documents such as the TRC, tax payment receipts, and any other relevant documents that substantiate the claim for relief under Section 90.
- Compute the Foreign Tax Credit: The taxpayer must calculate the foreign tax credit based on the tax paid in the foreign country and the tax liability in India. The credit is limited to the lower of the tax payable in India on the foreign income or the tax paid in the foreign country.
- Claim the Relief: After filing the required documents and forms, the taxpayer can claim the relief in their income tax return. The relief amount will be reflected in the tax computation, reducing the overall tax liability.
Understanding Form 67 Under the Income Tax Act
Form 67 is an essential document under the Income Tax Act that taxpayers must file to claim relief from double taxation on foreign income. This form is a part of the process for claiming a Foreign Tax Credit (FTC) when a taxpayer has paid taxes on income in a foreign country that is also subject to tax in India. The filing of Form 67 is crucial for those who seek to claim relief under Sections 90, 90A, and 91 of the Income Tax Act, which deal with the avoidance of double taxation.
When to File Form 67?
The Central Board of Direct Taxes (CBDT) mandates that Form 67 must be filed on or before the end of the relevant assessment year, provided the income tax return for that year has been filed within the due dates specified under Section 139(1) or Section 139(4) of the Income Tax Act.
For taxpayers who file an updated return under Section 139(8A), Form 67 must be filed by the date of filing the updated return, specifically for the income included. Importantly, to claim tax relief under Section 90, Form 67 must be submitted before the end of the assessment year. Failure to file Form 67 within this timeframe will result in the disqualification of the taxpayer from claiming the foreign tax credit.
Recent Amendments
The rules regarding the submission of Form 67 were revised with effect from April 1, 2022, and these changes apply to all FTC claims made during the fiscal year 2022-2023 and beyond. The revisions emphasize the importance of timely filing to ensure eligibility for claiming foreign tax credits, making it imperative for taxpayers to adhere to the updated deadlines.
Benefits of Section 90
- Avoidance of Double Taxation: The most significant benefit of Section 90 is that it prevents double taxation of the same income. This relief is crucial for individuals and businesses with cross-border income, as it reduces their tax burden and ensures fair treatment.
- Encourages International Trade and Investment: By providing clarity and relief from double taxation, Section 90 promotes international trade and investment. Businesses can operate in multiple countries without worrying about being taxed on the same income in each jurisdiction.
- Promotes Compliance: Section 90 encourages compliance with tax laws by providing a clear framework for claiming relief. Taxpayers are more likely to comply with tax regulations when they know that they will not be subject to double taxation.
- Dispute Resolution: The MAP provision under Section 90 offers a way to resolve disputes between countries regarding the interpretation or application of the DTAA. This mechanism ensures that taxpayers are not caught in prolonged tax disputes and can resolve issues efficiently.
Examples of Section 90 Application
Individual with Foreign Salary Income: Mr. A, an Indian resident, works for a company in the United States and earns a salary. He is taxed on this salary in the United States, and under the India-US DTAA, he can claim a credit for the tax paid in the United States against his tax liability in India on the same income.
Business with Overseas Operations: ABC Ltd., an Indian company, operates a branch in the United Kingdom. The profits earned by the branch are taxed in the UK. Under the India-UK DTAA, ABC Ltd. can claim a credit for the UK tax paid against its Indian tax liability on the branch profits.
Click here to learn more about NRI Residential Status for FY 2020-21
Conclusion
Section 90 of the Income Tax Act plays a crucial role in the global financial landscape by preventing the double taxation of income. It provides taxpayers with the tools they need to navigate the complexities of international taxation, ensuring that they are not unfairly burdened by multiple tax liabilities. By promoting international economic cooperation and providing a clear framework for tax relief, Section 90 helps businesses and individuals engage in cross-border activities with confidence. Understanding and correctly applying the provisions of Section 90 is essential for taxpayers with foreign income, ensuring compliance and optimizing their tax outcomes in an increasingly interconnected world.
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