Tax relief under Section 90 and Section 91 of the Income Tax Act
Income is said to be earned by a person in the country (source country):
- where he either renders his services or
- where he receives any income arising from an asset that is located in that country.
However, he may be based out in a different country (country of residence) You may have incomes from more than one country. Such incomes may be taxable in both the countries due to their domestic laws even though you are a tax resident in only one of those countries. Thus, to avoid paying such double taxes on the same income in both the source country and country of residence, double taxation avoidance agreements (“DTAA”) (otherwise known as tax treaties) are entered between various countries.
For example, an Indian company ABC Limited operating in Singapore, has to pay tax in Singapore on income earned there and has to also pay tax here in India on its income earned across the globe. Thus, it will be required to discharge its tax liability on income earned in Singapore as well. However, if the India-Singapore treaty exists, then tax relief may be claimed as per section 90. Else, relief may be claimed under section 91.
Generally, the tax laws of various resident countries allow a deduction from the total tax liability in their country in respect of taxes paid in the source country.
This mechanism of claiming deduction or credit of taxes paid in source country against tax liability in country of residence is called Foreign Tax Credit.
Read on to understand the provisions of Indian tax law for claiming foreign tax credit and how the same can be claimed.
Types of Relief
Tax relief can be provided in two ways:
a. Bilateral Relief: When two countries agree to offer relief from double taxation, then such relief shall be calculated in accordance with the mutual agreement between two such countries. Bilateral relief may be granted by either of the following methods:
Exemption Method: Income is taxed in only one country and exempted from tax in the other country. Two countries enter into an agreement that the income which is otherwise taxable in both the countries shall be taxed in one of the countries or that each of the two countries shall tax a specific portion of the income to avoid any double taxation.
Tax Credit Method: Under this method, income is taxed in both countries, and the foreign tax credit shall be granted to the taxpayer in his country of residence.
b. Unilateral Relief: Section 91 of Income Tax Act 1961 provides for Unilateral Relief which states that when there is no DTAA between two countries, the relief shall be provided by the country of residence.
Relief under Section 90 and 90A
Relief under this section may be claimed only by an Indian resident if India has entered into a DTAA with the other country or specified association from where you have earned income. If there is a DTAA with such country, then tax relief can be claimed u/s 90, and if the DTAA is with the specified associations, then tax relief can be claimed u/s 90A.
Under such DTAAs, the Indian government may agree on any or all of the following terms with the foreign governments:
- for providing relief regarding the income on which tax is paid under the Income Tax Act and tax law prevalent in such other countries.
- for the avoiding double taxation of income under the tax laws of both the countries
- for exchange of information and data:
a. to prevent tax evasion or avoidance under the tax laws of either of the countries or
b. for investigation of such tax evasion or avoidance or
- for recovery of income tax under the tax laws of both the countries
Suppose a bilateral agreement has been entered into with a foreign country. The taxpayer has an option to either be taxed as per the agreement (DTAA) or as per the normal provisions of the Income Tax Act, whichever is more beneficial to such taxpayer.
Relief under Section 91
Relief under this section may be claimed by an Indian resident only if there is no DTAA with the other country from where you have earned income. Such relief is given voluntarily by India in case of unilateral agreements.
Manner of computation
The foreign tax credit shall be computed separately for each source of income. It shall be computed as lower of:
- Tax payable on such income under the Income Tax Act and
- Foreign tax paid;
The foreign tax credit shall be determined by conversion of the foreign currency at the Telegraphic Transfer Buying Rate (TTBR) of the last day of the month immediately preceding the month in which the foreign tax has been paid or deducted.
Note that the foreign tax credit shall be the total of credit computed separately for each source of income arising from a particular country.
Computing double taxation relief under section 90:
- Step 1: Compute Global Income, i.e. aggregate of Indian income and Foreign income;
- Step 2: Compute tax on such global income under Income tax;
- Step 3: Compute average rate of tax (amount of tax divided by global income);
- Step 4: Compute an amount by multiplying such average rate of tax with foreign income;
- Step 5: Compute tax paid in a foreign country
The amount of relief shall be lower of step 4 and step 5
E.g., Mr A, an Indian resident, earned income in India INR 2,00,000. He also earned income from the USA equivalent to INR 3,00,000 (Tax paid in foreign country INR 20,000). The tax relief Mr A can claim, and the tax he shall be required to pay is computed as follows:
- Step 1: Global income is INR 5,00,000 (INR 2,00,000 + INR 3,00,000)
- Step 2: Tax on global income INR 12,500
- Step 3: Average rate of tax INR 2.5% (12,500/5,00,000*100)
- Step 4: Tax required to be paid INR 7,500 (3,00,000*2.5/100)
- Step 5: Tax paid in foreign country is INR 20,000
The amount of relief shall be lower of step 4 and step 5, i.e. INR 7,500
Computing relief under section 91:
- Step 1: Calculate the tax payable in India
- Step 2: Compare the Indian tax rate and foreign tax rate
- Step 3: Multiply the lower tax rate with the doubly taxed income. This will be the amount of relief under section 91.
E.g., Mr X has doubly taxed foreign income of INR 2,00,000. Tax payable in India is at the rate of 30%. The foreign tax rate is 20%. The relief shall be calculated as follows:
- Step 1: Tax payable in India will be INR 60,000 (2,00,000*30%)
- Step 2: Lower of Indian rate of tax (30%) and foreign tax rate (20%) is 20%.
- Step 3: The relief will be INR 40,000 (2,00,000*20%)
The amount of relief will be as computed in Step 3, i.e. INR 40,000.
Rules for claiming the foreign tax credit
Rules for claiming the foreign tax credit are notified under Rule 128 of Income Tax Rules. Certain significant rules are enumerated below:
- a. The foreign tax credit shall be claimed by an Indian resident only if he has paid any tax in a foreign country or specified territory outside India. Such credit can be claimed in the year in which the income corresponding to such tax has been assessed to tax or offered to tax in India. However, if such income is offered/assessed to tax in more than one year, then foreign tax credit can be claimed across those years in proportion to the income offered/ assessed to tax in India;
- b. The foreign tax credit shall be available only against the amount of tax (including tax paid as per MAT/AMT), surcharge, cess payable under the Indian tax laws and not against interest, penalty or fee;
- c. The foreign tax credit shall not be available on the foreign tax, which the taxpayer disputes. Such tax credit shall be available only after the dispute is settled if the taxpayer provides the following within 6 months from the end of the month in which the dispute was finally settled:
- evidence for the settlement of dispute
- evidence for payment of the disputed tax
- a declaration that no refund of such amount is claimed or will be claimed whether directly or indirectly
- d. Documents required to be provided for claiming the foreign tax credit: For claiming the foreign tax credit, the taxpayer shall be required to provide the following documents:
i. statement in Form No. 67
ii. certificate or statement indicating the nature of income and the amount of tax deducted or paid by the taxpayer
(a) from the tax authority of foreign nation; or
(b) from the person who is responsible for deduction of such tax; or
(c) a statement signed by the taxpayer accompanied by the following documents:
- where tax has been paid: an acknowledgement or challan for online payment or bank counterfoil
- where the tax has been deducted: proof of deduction
Such documents shall be furnished on or before the due date of filing income tax return as per section 139(1) of the Income Tax Act.
Penalties for tax evasion or avoidanceA) Default in making payment of tax
The tax authorities shall determine the penalty amount leviable. However, such a penalty amount will not exceed the amount of tax payable.B) Under-reporting of income
The penalty shall be 50% of tax payable on under-reported income, i.e. income declared by the taxpayer is less than the income determined by the tax authorities.
The penalty shall be increased to 200% of the tax payable if under-reporting is due to misreported income.
The penalty leviable is ?25,000 generally.
However, if the taxpayer has entered into any international transaction, then the penalty will be 2% of the value of such international transactions or specified domestic transactions.
In case the income tax authorities find that the books of accounts provided by the taxpayer contain the following:
- forged or counterfeit documents such as a fake invoice or any fake documentary evidence
- a sales invoice or purchase invoice without actual supply or receipt of goods or services.
- a sales invoice or purchase invoice received from a person who does not exist
- an omission of any entry that is significant for computation of taxable income.
Regarding the above cases, the assessee might have to pay the penalty equivalent to the sum of such false or omitted entries.E) Undisclosed income
a. In case of undisclosed income, a penalty @10% is payable.
b. Where search proceeding has been initiated on or after 1/7/2012 but before 15/12/2016:
- If undisclosed income is admitted during search and the taxpayer pays the tax along with interest and files ITR, then a penalty @ 10% of such undisclosed income shall be levied.
- If undisclosed income is not admitted during the search, but the same is furnished in the ITR filed after such search, then a penalty of 20% of such undisclosed income shall be levied. - In all other cases, a penalty shall be levied @ 60%
c. Where Search has been initiated on/ after 15/12/2016
- If undisclosed income is admitted during search and the taxpayer pays the tax along with interest and files ITR, then a penalty @ 30% of such undisclosed income shall be levied.
- In all other cases, a penalty shall be levied @ 60%
In case Income Tax Return is not furnished in full compliance with the relevant provisions of the Act, then the Assessing Officer can penalise the taxpayer with a penalty of INR 5,000.
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