unit 7 foreign collaboration and double taxation relief · foreign collaboration and double...
Post on 05-Sep-2018
222 Views
Preview:
TRANSCRIPT
150
UNIT 7
FOREIGN COLLABORATION AND DOUBLE TAXATION RELIEF
STRUCTURE OF THE CHAPTER
7.1 Introduction
7.2 Agreement with foreign countries or specified territories [Sec. 90]
7.3 Adoption by Central Government of agreement between specified associations for double
taxation relief [Sec. 90A]
7.4 Countries with which no agreement exists [Sec. 91]
7.5 Summary
7.1 INTRODUCTION
This lesson discusses the tax concepts related to double taxation. To save a person from double
taxation, provisions of section 90, 90A and 91 of Income-tax Act are applicable.
Foreign Income of a person generally becomes liable to tax in two countries, the country in which
income is earned and the country in which the person is resident.
Double taxation of such income is avoided by providing some relief to the tax-payer in the
following forms:
1. Double Taxation Avoidance agreements (DTAAs/ ADTs)
2. Unilateral Relief
7.2 AGREEMENT WITH FOREIGN COUNTRIES OR SPECIFIED TERRITORIES
[SEC. 90]
The Central Government may enter into an agreement with the Government of any country outside
India (or specified territory outside India) and may, by notification in the Official Gazette, make
such provisions as may be necessary for implementing the agreement –
a. for the granting of relief in respect of –
i. income on which have been paid both income-tax under this Act and income-tax in
that country (or specified territory), as the case may be; or
ii. income-tax chargeable under this Act and under the corresponding law in force in
that country (or specified territory), as the case may be, to promote mutual
economic relations, trade and investment; or
b. for the avoidance of double taxation of income under this Act and under the corresponding
law in force in that country (or specified territory), as the case may be; or
c. for exchange of information for the prevention of evasion or avoidance of income-tax
chargeable under this Act or under the corresponding law in force in that country (or
specified territory), as the case may be, or investigation of cases of such evasion or
avoidance; or
d. for recovery of income-tax under this Act and under the corresponding law in force in that
country (or specified territory), as the case may be.
151
Applicability of the provisions –
Where the Central Government has entered into an agreement with the Government of any country
outside India (or specified territory outside India), as the case may be, for granting relief of tax (or
avoidance of double taxation), then, in relation to the assessee to whom such agreement applies,
the provisions of this Act shall apply to the extent they are more beneficial to that assessee.
Further, the provisions of this section shall apply to the assessee even if such provisions are not
beneficial to him.
Notes –
1. An assessee, not being a resident, to whom the agreement under section 90 applies, shall
not be entitled to claim any relief under such agreement unless a certificate of his being a
resident in any country outside India (or specified territory outside India), as the case may
be, is obtained by him from the Government of that country (or specified territory).
2. It is to be noted that charge of tax in respect of a foreign company at a rate higher than the
rate at which a domestic company is chargeable, shall not be regarded as less favorable
charge (or levy of tax in respect of such foreign company).
3. The Central Government has notified the following areas outside India as the 'specified
territory' for the purposes of section 90 –
a. Bermuda a British Overseas Territory
b. British Virgin Islands a British Overseas Territory
c. Cayman Islands a British Overseas Territory
d. Gibraltar a British Overseas Territory
e. Guernsey a British Crown Dependency
f. Isle of Man a British Crown Dependency
g. Jersey a British Crown Dependency
h. Netherlands Antilles an Autonomous Part of the Kingdom of Netherlands
i. Macau a Special Administrative Region of The People's Republic
of China
j. Hong Kong a Special Administrative Region of the People's Republic
of China
k. Sint Maarten a part of Kingdom of Netherlands.
Relevant Rulings on Section 90 –
1. In case of conflict between Income-tax Act and provisions of DTAA, provisions of DTAA
would prevail over provisions of Income-tax Act.
2. For claiming exemption under DTAA it is not necessary that assessee should produce proof
of payment of tax.
3. Section 90 provides relief from double taxation where income of assessee is chargeable
under Income-tax Act as well as in corresponding law in force in foreign country; therefore,
assessee would be entitled to take credit of Income-tax paid in a foreign country even in
relation to income which is exempt under section 10A.
152
Some common methods of granting relief under such section 90 –
1. Exemption Method
Under this method, a particular income is taxed in one country and exempt in another
country.
2. Tax Credit Method
Under this method an income is taxable in both the countries in accordance with their
respective tax laws read with such agreements. The home country (where the assessee is
resident) permits deduction of taxes paid by residents in host country from the tax due on
worldwide income in the home country. The objective is to reduce tax on foreign source
income to the extent that income has already been taxed in the foreign jurisdiction.
Under the tax credit system, the tax payer pays the higher of the two taxes.
3. Deduction System
Under this system, foreign tax is allowed as a deduction from profits liable to tax in the
home country.
This system differs from the tax credit method in the sense that foreign tax is deducted
from tax base under this system whereas it is credited against the tax liability under the tax
credit method.
Above methods are explained below with the help of an example –
Earnings abroad Rs. 100, tax rate in host country is 40% and tax rate in home country is 60%.
Particulars No Relief
(Rs.)
Exemption
Method (Rs.)
Tax Credit
Method (Rs.)
Deduction
Method (Rs.)
Income (a) 100 100 100 100
Tax paid in host country
(40%) (b)
40 40 40 40
Tax paid in home country
(60%)
60 Nil 20 36 [60%(a-b)]
Total tax paid by the
assessee (c)
100 40 60 76
Remaining income with the
assessee (a) – (c)
Nil 60 40 24
7.3 ADOPTION BY CENTRAL GOVERNMENT OF AGREEMENT BETWEEN
SPECIFIED ASSOCIATIONS FOR DOUBLE TAXATION RELIEF [SEC. 90A]
Any specified association in India may enter into an agreement with any specified association in
the specified territory outside India and the Central Government may, by notification in the Official
Gazette, make such provisions as may be necessary for adopting and implementing such agreement
–
a. for the granting of relief in respect of –
i. income on which have been paid both income-tax under this Act and income-tax in
any specified territory outside India; or
153
ii. income-tax chargeable under this Act and under the corresponding law in force in
that specified territory outside India to promote mutual economic relations, trade
and investment; or
b. for the avoidance of double taxation of income under this Act and under the corresponding
law in force in that specified territory outside India; or
c. for exchange of information for the prevention of evasion or avoidance of income-tax
chargeable under this Act or under the corresponding law in force in that specified territory
outside India, or investigation of cases of such evasion or avoidance; or
d. for recovery of income-tax under this Act and under the corresponding law in force in that
specified territory outside India.
Applicability of the provisions –
Where a specified association in India has entered into an agreement with a specified association
of any specified territory outside India and such agreement has been notified for granting relief of
tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom
such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial
to that assessee.
Further, the above provisions shall apply to the assessee even if such provisions are not beneficial
to him.
Notes –
1. An assessee, not being a resident, to whom the agreement under section 90A applies, shall
not be entitled to claim any relief under such agreement unless a certificate of his being a
resident in any specified territory outside India, is obtained by him from the Government
of that specified territory.
2. It is to be noted that the charge of tax in respect of a company incorporated in the specified
territory outside India at a rate higher than the rate at which a domestic company is
chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such
company.
3. "specified association" means any institution, association or body, whether incorporated or
not, functioning under any law for the time being in force in India or the laws of the
specified territory outside India and which may be notified as such by the Central
Government for the purposes of this section.
7.4 COUNTRIES WITH WHICH NO AGREEMENT EXISTS [SEC. 91]
The relief under section 91 is granted to an assessee who fulfills all the following conditions –
1. The assessee is resident in India in any previous year.
2. His income is accrued (or arose) during that previous year outside India (and which is not
deemed to accrue or arise in India).
3. He has paid tax in that country where the income accrued (or arose).
154
4. There is no agreement with than country under section 90 for the relief or avoidance of
double taxation.
Amount of relief –
Under section 91, the assessee is entitled to the deduction from the Indian income-tax payable by
him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of
the said country, whichever is the lower.
Notes –
1. "Indian rate of tax" means the rate determined by dividing the amount of Indian income-
tax after deduction of any relief due under the provisions of this Act but before deduction
of any relief due under section 90, 90A and 91, by the total income.
2. "Rate of tax of the said country" means income-tax and super-tax actually paid in the said
country in accordance with the corresponding laws in force in the said country after
deduction of all relief due, but before deduction of any relief due in the said country in
respect of double taxation, divided by the whole amount of the income as assessed in the
said country.
3. Double taxation relief is allowable on foreign income included in the net taxable income
or net taxable income, whichever is less. In other words, it can be said that relief cannot be
granted on the amount exceeding net taxable income.
4. Relief under section 91(1) is to be calculated on country-wise basis and not on basis of
aggregation or amalgamation of income of all foreign countries. Therefore, an assessee is
entitled to double income-tax relief under section 91 in respect of income from one country
without adjusting losses from another country.
Steps for calculating unilateral relief under section 91 –
Step 1: Compute the Net Taxable Income (NTI) of an assessee including foreign income.
Step 2: Compute the net tax liability (including surcharge and cess) of the assessee as per the
Income Tax Act, 1961
Step 3: Compute the Indian Rate of Tax (IRT) as well as Foreign Rate of Tax (FRT):
IRT = 𝐼𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥 𝑐𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑒𝑑 𝑖𝑛 𝑠𝑡𝑒𝑝 (2)
𝑁𝑒𝑡 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑜𝑓 𝑠𝑡𝑒𝑝 (1)* 100
FRT = 𝐼𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥 𝑝𝑎𝑖𝑑 𝑖𝑛 𝑓𝑜𝑟𝑒𝑖𝑔𝑛 𝑐𝑜𝑢𝑛𝑡𝑟𝑦
𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐼𝑛𝑐𝑜𝑚𝑒* 100
Step 4: Relief under section 91 = Double Taxed Income* Lower of IRT and FRT
Step 5: Computation of net tax liability of the assessee in India:
Tax calculated in step (2) XX
155
minus Relief under section 91 in step (4) XX
Net tax liability of the assessee in India XXX
Case 1 –
A resident individual has derived the following income during the previous year 2015-16:
Amount (Rs.)
Income from profession 4,94,000
Share of profit from a partnership firm in Singapore 50,000
(Tax paid in Singapore for his income in equivalent Rupees is Rs. 10,000)
Interest from bank deposits in India 28,000
He wants to know whether he is eligible for any double tax relief and if so, its quantum. He also
wants to know his final tax liability. India does not have any double taxation avoidance agreement
with Singapore.
In the present case, the assessee satisfies all the given below conditions of section 91 and thus,
entitled for relief under section 91 –
1. The assessee is resident in India in any previous year.
2. His income is accrued (or arose) during that previous year outside India (and which is not
deemed to accrue or arise in India).
3. He has paid tax in that country where the income accrued (or arose).
4. There is no agreement with than country under section 90 for the relief or avoidance of
double taxation.
Relief under section 91 is computed as follows –
Step 1: Computation of Net Taxable Income of the individual for the assessment year 2016-17:
Particulars Amount (Rs.)
Business Income
Income from other sources (Interest on bank deposits)
Indian Income
Add: Foreign Income
Gross Total Income (GTI)
Less: Deductions under chapter VIA
Net Taxable Income (NTI)
4,94,000
28,000
5,22,000
50,000
5,72,000
Nil
5,72,000
Step 2: Tax on NTI of Rs. 5,72,000 of the individual for the assessment year 2016-17:
Amount (Rs.)
[Rs. 25,000 + 20% (Rs. 5,72,000 - Rs. 5,00,000)] 39,400
Add: Surcharge Nil
Total 39,400
Add: EC @ 2% 788
SHEC @ 1% 394
Net tax liability (Rounded off) 40,580
Step 3: Indian Rate of Tax (IRT) =𝑇𝑎𝑥 𝑐𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑒𝑑 𝑖𝑛 𝑠𝑡𝑒𝑝 (2)
𝑁𝑒𝑡 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑜𝑓 𝑠𝑡𝑒𝑝 (1) * 100
40,580/5,72,000 * 100 = 7.09%
156
Foreign Rate of Tax (FRT) = 𝑇𝑎𝑥 𝑝𝑎𝑖𝑑 𝑖𝑛 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝑐𝑜𝑢𝑛𝑡𝑟𝑦
𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐼𝑛𝑐𝑜𝑚𝑒 * 100
10,000/50,000 * 100 = 20%
Step 4: Relief under section 91 = Rs. 50,000 * 7.09% = Rs. 3,545
Step 5: Net tax to be paid in India by the individual in the assessment year 2016-17
= Rs. 40,580 – Rs. 3,545 = Rs. 37,040 (Rounded off)
Note –
It is assumed that interest income from bank is earned from fixed deposits.
Case 2 –
Mr. D is a musician deriving income from concerts performed outside India of Rs. 2,50,000. Tax
of Rs. 50,000 was deducted at source in the country where the concerts were held. India does not
have any DTAA with that country. Assuming that the Indian income of D is Rs. 5,00,000, what is
the amount of tax payable by him in India for the assessment year 2016-17?
Relief under section 91 is computed as follows –
Step 1: Computation of Net Taxable Income of Mr. D for the assessment year 2016-17:
Particulars Amount (Rs.)
Indian Income
Add: Foreign Income
Gross Total Income (GTI)
Less: Deductions under chapter VIA
Net Taxable Income (NTI)
5,00,000
2,50,000
7,50,000
Nil
7,50,000
Step 2: Tax on NTI of Rs. 7,50,000 of Mr. D for the assessment year 2016-17:
Amount (Rs.)
[Rs. 25,000 + 20% (Rs. 7,50,000 – Rs. 5,00,000)] 75,000
Add: Surcharge Nil
Total 75,000
Add: EC @ 3% 2,250
Net tax liability 77,250
Step 3: Indian Rate of Tax (IRT) =𝑇𝑎𝑥 𝑐𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑒𝑑 𝑖𝑛 𝑠𝑡𝑒𝑝 (2)
𝑁𝑒𝑡 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑜𝑓 𝑠𝑡𝑒𝑝 (1) * 100
77,250/7,50,000 * 100 = 10.30%
Foreign Rate of Tax (FRT) = 𝑇𝑎𝑥 𝑝𝑎𝑖𝑑 𝑖𝑛 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝑐𝑜𝑢𝑛𝑡𝑟𝑦
𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐼𝑛𝑐𝑜𝑚𝑒 * 100
50,000/2,50,000 * 100 = 20%
Step 4: Relief under section 91 = Rs. 2,50,000 * 10.30% = Rs. 25,750
Step 5: Net tax to be paid in India by Mr. D in the assessment year 2016-17
= Rs. 77,250 – Rs. 25,750 = Rs. 51,500
157
Case 3 –
Professor K, an individual and citizen of India, earned the following remuneration during the
previous year 2015-16:
Amount (Rs.)
Salary from Delhi university for 8 months 4,00,000
Salary from U.S. University 4,00,000
He went to U.S. on leave without pay for four months during the previous year. He returned to
India on 1.1.2016 and brought with him Rs. 3,00,000 in convertible foreign exchange. The foreign
university deducted tax at source Rs. 50,000.
Compute the amount of tax payable for the assessment year 2016-17.
Relief under section 91 is computed as follows –
Step 1: Computation of Net Taxable Income of Professor K for the assessment year 2016-17:
Particulars Amount (Rs.)
Indian Income (Income from salary)
Add: Foreign Income
Gross Total Income (GTI)
Less: Deductions under chapter VIA
Net Taxable Income (NTI)
4,00,000
4,00,000
8,00,000
Nil
8,00,000
Step 2: Tax on NTI of Rs. 8,00,000 of Professor K for the assessment year 2016-17:
Amount (Rs.)
[Rs. 25,000 + 20% (Rs. 8,00,000 - Rs. 5,00,000)] 85,000
Add: Surcharge Nil
Total 85,000
Add: Cess @ 3% 2,550
Net tax liability 87,550
Step 3: Indian Rate of Tax (IRT) =𝑇𝑎𝑥 𝑐𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑒𝑑 𝑖𝑛 𝑠𝑡𝑒𝑝 (2)
𝑁𝑒𝑡 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑜𝑓 𝑠𝑡𝑒𝑝 (1) * 100
87,550/8,00,000 * 100 = 10.94%
Foreign Rate of Tax (FRT) = 𝑇𝑎𝑥 𝑝𝑎𝑖𝑑 𝑖𝑛 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝑐𝑜𝑢𝑛𝑡𝑟𝑦
𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐼𝑛𝑐𝑜𝑚𝑒 * 100
50,000/4,00,000 * 100 = 12.5%
Step 4: Relief under section 91 = Rs. 4,00,000 * 10.94% = Rs. 43,760
Step 5: Net tax to be paid in India by Professor K in the assessment year 2016-17
= Rs. 87,550 – Rs. 43,760 = Rs. 43,790
Case 4 –
Mr. B is resident in India. The following points are noted for the previous year 2015-16 from the
books of account:
Amount (Rs.)
Income from a business in India (-) 2,00,000
158
Income from a business in country X 5,00,000
(India does not have DTAA with country X)
Income from other sources in India (Interest on Govt. securities) 1,20,000
PPF contribution 70,000
Tax levied in country X 9,000
Compute the amount of relief under section 91 and income tax payable in India for the assessment
year 2016-17.
Relief under section 91 is computed as follows –
Step 1: Computation of Net Taxable Income of Mr. B for the assessment year 2016-17:
Particulars Amount (Rs.)
Business Income
Income from other sources (Interest on government securities)
Indian Income
Add: Foreign Income
Gross Total Income (GTI)
Less: Deductions under chapter VIA
Net Taxable Income (NTI)
(2,00,000)
1,20,000
(80,000)
5,00,000
4,20,000
70,000
3,50,000
Step 2: Tax on NTI of Rs. 3,50,000 of Mr. B for the assessment year 2016-17:
Amount (Rs.)
[10% (Rs. 3,50,000 - Rs. 2,50,000)] 10,000
Less: Rebate under section 87A 2,000
8,000
Add: Surcharge Nil
Total 8,000
Add: Cess @ 3% 240
Net tax liability 8,240
Step 3: Indian Rate of Tax (IRT) =𝑇𝑎𝑥 𝑐𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑒𝑑 𝑖𝑛 𝑠𝑡𝑒𝑝 (2)
𝑁𝑒𝑡 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑜𝑓 𝑠𝑡𝑒𝑝 (1) * 100
8,240/3,50,000 * 100 = 2.35%
Foreign Rate of Tax (FRT) = 𝑇𝑎𝑥 𝑝𝑎𝑖𝑑 𝑖𝑛 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝑐𝑜𝑢𝑛𝑡𝑟𝑦
𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐼𝑛𝑐𝑜𝑚𝑒 * 100
9,000/5,00,000 * 100 = 1.8%
Step 4: Relief under section 91 = Rs. 3,50,000 * 1.8% = Rs. 6,300
Step 5: Net tax to be paid in India by Mr. B in the assessment year 2016-17
= Rs. 8,240 – Rs. 6,300 = Rs. 1,940
Case 5 –
X is a resident in India for income tax purposes. His total income in previous year 2015-16 is Rs.
4,45,000, which includes net foreign income of Rs. 45,000 (Income Rs. 50,000 – Tax paid in foreign
country, Rs. 5,000) from a country with which India does not have DTAA. Will X be allowed relief
159
from double taxation? If so, what are the conditions prescribed for the purpose and what will be
the amount of relief and tax paid in India?
In the present case, X satisfies all the given below conditions of section 91 and thus, entitled for
relief under section 91 –
1. He is resident in India in any previous year.
2. His income is accrued (or arose) during that previous year outside India (and which is not
deemed to accrue or arise in India).
3. He has paid tax in that country where the income accrued (or arose).
4. There is no agreement with than country under section 90 for the relief or avoidance of
double taxation.
Relief under section 91 is computed as follows –
Step 1: Computation of Net Taxable Income of X for the assessment year 2016-17:
Particulars Amount (Rs.)
Indian Income
Add: Foreign Income
Gross Total Income (GTI)
Less: Deductions under chapter VIA
Net Taxable Income (NTI)
4,00,000
50,000
4,50,000
Nil
4,50,000
Step 2: Tax on NTI of Rs. 4,50,000 of X for the assessment year 2016-17:
Amount (Rs.)
[10% (Rs. 4,50,000 - Rs. 2,50,000)] 20,000
Less: Rebate under section 87A 2,000
18,000
Add: Surcharge Nil
Total 18,000
Add: Cess @ 3% 540
Net tax liability 18,540
Step 3: Indian Rate of Tax (IRT) =𝑇𝑎𝑥 𝑐𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑒𝑑 𝑖𝑛 𝑠𝑡𝑒𝑝 (2)
𝑁𝑒𝑡 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑜𝑓 𝑠𝑡𝑒𝑝 (1)* 100
18,540/4,50,000*100 = 4.12%
Foreign Rate of Tax (FRT) = 𝑇𝑎𝑥 𝑝𝑎𝑖𝑑 𝑖𝑛 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝑐𝑜𝑢𝑛𝑡𝑟𝑦
𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐼𝑛𝑐𝑜𝑚𝑒* 100
5,000/50,000* 100 = 10%
Step 4: Relief under section 91 = 50,000 * 4.12% = 2,060
Step 5: Net tax to be paid in India by X in the assessment year 2016-17
= Rs. 18,540 – Rs. 2,060 = Rs. 16,480
Case 6 –
X, an individual, resident of India has the following incomes during previous year 2015-16:
Amount (Rs.)
160
Indian income 4,00,000
Royalty on books sold in a foreign country 4,50,000
Tax levied in foreign country on income mentioned above 50,000
Compute his tax liability. India does not have DTAA with this foreign country.
Relief under section 91 is computed as follows –
Step 1: Computation of Net Taxable Income of X for the assessment year 2016-17:
Particulars Amount (Rs.)
Indian Income
Add: Foreign Income (Royalty Income)
Gross Total Income (GTI)
Less: Deductions under section 80QQB
Net Taxable Income (NTI)
4,00,000
4,50,000
8,50,000
3,00,000
5,50,000
Step 2: Tax on NTI of Rs. 5,50,000 of X for the assessment year 2016-17:
Amount (Rs.)
[Rs. 25,000 + 20% (Rs. 5,50,000 - Rs. 5,00,000)] 35,000
Add: Surcharge Nil
Total 35,000
Add: Cess @ 3% 1,050
Net tax liability 36,050
Step 3: Indian Rate of Tax (IRT) =𝑇𝑎𝑥 𝑐𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑒𝑑 𝑖𝑛 𝑠𝑡𝑒𝑝 (2)
𝑁𝑒𝑡 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑜𝑓 𝑠𝑡𝑒𝑝 (1) * 100
36,050/5,50,000 * 100 = 6.56%
Foreign Rate of Tax (FRT) = 𝑇𝑎𝑥 𝑝𝑎𝑖𝑑 𝑖𝑛 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝑐𝑜𝑢𝑛𝑡𝑟𝑦
𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐼𝑛𝑐𝑜𝑚𝑒 * 100
50,000/4,50,000 * 100 = 11.11%
Step 4: Relief under section 91 = Rs. 1,50,000 * 6.56% = Rs. 9,840
Step 5: Net tax to be paid in India by X for the assessment year 2016-17
= Rs. 36,050 – Rs. 9,840 = Rs. 26,210
Case 7 –
X, a resident Indian, has derived the following incomes for the previous year 2015-16 relevant to
the assessment year 2016-17:
Amount (Rs.)
Income from Profession 1,94,000
Income from house property in country X 40,000
(Tax paid for income in country X in equivalent Rs. 2,000)
Royalty on books from foreign country Y 6,00,000
(Tax paid in country Y @ 20% converted in Indian Rs.)
Expenses incurred for earning royalty is Rs. 1,00,000
Income from scheduled banks 18,000
161
Compute the income tax payable by X in India. India has no DTAA with country X and country Y.
Relief under section 91 is computed as follows –
Step 1: Computation of Net Taxable Income of X for the assessment year 2016-17:
Particulars Amount (Rs.)
Income from House Property in country X
Business Income
Royalty Income from country Y 6,00,000
Less: Expenses incurred 1,00,000
Income from scheduled banks
Gross Total Income (GTI)
Less: Deduction under section 80QQB
Net Taxable Income (NTI)
40,000
1,94,000
5,00,000
18,000
7,52,000
3,00,000
4,52,000
Step 2: Tax on NTI of Rs. 4,52,000 of X for the assessment year 2016-17:
Amount (Rs.)
[10% (Rs. 4,52,000 - Rs. 2,50,000)] 20,200
Less: Rebate under section 87A 2,000
18,200
Add: Surcharge Nil
Total 18,200
Add: Cess @ 3% 546
Net tax liability (Rounded off) 18,750
Step 3: Average Rate of Tax (ART) =𝑇𝑎𝑥 𝑐𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑒𝑑 𝑖𝑛 𝑠𝑡𝑒𝑝 (2)
𝑁𝑒𝑡 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑜𝑓 𝑠𝑡𝑒𝑝 (1) * 100
18,750/4,52,000 * 100 = 4.15%
Foreign Rate of Tax (FRTX) = 𝑇𝑎𝑥 𝑝𝑎𝑖𝑑 𝑖𝑛 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝑐𝑜𝑢𝑛𝑡𝑟𝑦
𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐼𝑛𝑐𝑜𝑚𝑒 * 100
2,000/40,000 * 100 = 5%
Foreign Rate of Tax (FRTY) = 𝑇𝑎𝑥 𝑝𝑎𝑖𝑑 𝑖𝑛 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝑐𝑜𝑢𝑛𝑡𝑟𝑦
𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐼𝑛𝑐𝑜𝑚𝑒 * 100
1,00,000/5,00,000 * 100 = 20%
Step 4: Relief on income of country X under section 91 = Rs. 40,000 * 4.15% = Rs. 1,660
Relief on income of country Y under section 91 = Rs. 2,00,000 * 4.15% = Rs. 8,300
Total relief under section 91 = Rs. 1,660 + Rs. 8,300 = Rs. 9,960
Step 5: Net tax to be paid in India by X assessment year 2016-17
= Rs. 18,750 – Rs. 9,960 = Rs. 8,790 (Rounded off)
Case 8 –
X (28 years) is ROR in India. His income is Rs. 3,46,000 from a business in India and Rs. 1,92,000
from a business in a foreign country with whom India has an ADT agreement. According to ADT
162
agreement, income is taxable in the country in which it is earned and not in the other country.
However, in the other country, such income can be included for computation of tax rate. According
to the tax laws of the foreign country, business income of Rs. 1,92,000 is taxable @ 23 percent.
During the previous year, X has deposited Rs. 42,000 in his public provident fund account (out of
which Rs. 10,000 is deposited out of foreign income). He has also received an interest of Rs. 32,000
on Government Securities. Find out X’s tax liability under the Income Tax Act for the assessment
year 2016-17.
Relief under section 91 is computed as follows –
Step 1: Computation of Net Taxable Income of X for the assessment year 2016-17:
Particulars Amount (Rs.)
Business Income
Income from other sources
Indian Income
Add: Foreign Income
Gross Total Income (GTI)
Less: Deductions under section 80C
Net Taxable Income (NTI)
3,46,000
32,000
3,78,000
1,92,000
5,70,000
42,000
5,28,000
Step 2: Tax on NTI of Rs. 5,28,000 of X for the assessment year 2016-17:
Amount (Rs.)
[Rs. 25,000 + 20% (Rs. 5,28,000 - Rs. 5,00,000)] 30,600
Add: Surcharge Nil
Total 30,600
Add: Cess @ 3% 918
Net tax liability (Rounded off) 31,520
Step 3: Indian Rate of Tax (IRT) =𝑇𝑎𝑥 𝑐𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑒𝑑 𝑖𝑛 𝑠𝑡𝑒𝑝 (2)
𝑁𝑒𝑡 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑜𝑓 𝑠𝑡𝑒𝑝 (1) * 100
31,520/5,28,000 * 100 = 5.97%
Foreign Rate of Tax = 23%
Step 4: Relief under section 91 = Rs. 1,92,000 * 5.97% = Rs. 11,462
Step 5: Net tax to be paid in India by X for the assessment year 2016-17
= Rs. 31,520 – Rs. 11,462 = Rs. 20,060 (Rounded off)
Note:
Deduction of PPF has no relation with foreign income.
Case 9 –
X, an individual, is resident and ordinarily resident in India. During the previous year 2015-16,
he has earned the following incomes:
Amount (Rs.)
Income from business A situated in India 8,00,000
Income from business B situated in a foreign country R 7,15,000
Tax paid in this country 2,80,000
163
Loss from business C situated in another foreign country S (1,60,000)
Income from other sources in India 40,000
Amount of deduction under section 80C 80,000
Compute the tax liability of X for the assessment year 2016-17. India does not have DTAA with
any of the foreign countries given above.
Relief under section 91 is computed as follows –
Step 1: Computation of Net Taxable Income of X for the assessment year 2016-17:
Particulars Amount (Rs.)
Business Income (Rs. 8,00,000 + Rs. 7,15,000 – Rs. 1,60,000)
Income from other sources
Gross Total Income (GTI)
Less: Deductions under section 80C
Net Taxable Income (NTI)
13,55,000
40,000
13,95,000
80,000
13,15,000
Step 2: Tax on NTI of Rs. 13,15,000 of X for the assessment year 2014-15:
Amount (Rs.)
[Rs. 1,25,000 + 30% (Rs. 13,15,000 - Rs. 10,00,000)] 2,19,500
Add: Surcharge Nil
Total 2,19,500
Add: Cess @ 3% 6,585
Net tax liability (Rounded off) 2,26,090
Step 3: Indian Rate of Tax (IRT) =𝑇𝑎𝑥 𝑐𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑒𝑑 𝑖𝑛 𝑠𝑡𝑒𝑝 (2)
𝑁𝑒𝑡 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑜𝑓 𝑠𝑡𝑒𝑝 (1) * 100
2,26,090/13,15,000 * 100 = 17.19%
Foreign Rate of Tax (FRTR) = 2,80,000/7,15,000 * 100% = 39.16%
Step 4: Relief under section 91 = Rs. 7,15,000 * 17.19% = Rs. 1,22,909
Step 5: Net tax to be paid in India by X for the assessment year 2016-17
= Rs. 2,26,090 – Rs. 1,22,909 = Rs. 1,03,180 (Rounded off)
Note:
To calculate Indian tax rate, one has to first find out taxable income in India from all sources
(including loss from foreign business C). In other words, to find out average rate of tax in India,
loss from business C shall be taken into consideration. The ruling of Bombay high court supports
this view as per the case [CIT v. Bombay Burmah Trading Corpn. Ltd. [2003] 126 Taxmann 403
(Bom.)] in which the Court stated that, to find out doubly taxed income, loss incurred in business
C in another foreign country cannot be reduced.
7.5 SUMMARY
top related