An Indian resident may be liable to pay tax on his cross border income twice, first at country of residence and second at country of source of income
In this era of globalisation, an individual’s earnings is often from across the border. He can be a resident of one country, but earning income from other countries in a particular financial year. Such a situation is an indicator of progress and increased opportunities for an individual. However, at the same time issues and complexities surrounding taxation of such income in home country of the individual or at source country often gives sleepless nights to the individual.
Right of taxation
Each country has its own taxing rights under its domestic laws. When a taxpayer is involved in a cross-border transaction and earns income across borders, he is more likely to end up with much higher tax liability compared to a domestic transaction, due to overlapping taxing rights of source country where income is earned and country of residence of such individual.
Under Indian income tax laws, an Indian resident is required to pay income tax on his global income. At the same time, if such resident is earning income (salary from short term deputation, capital gains, interest, royalty or fees for technical services, etc.) from another country without changing residential status, source country would also seek to tax such income based on place of accrual of income. Thus, in normal circumstances, the Indian resident may be liable to pay tax on his cross border income twice, firstly at country of residence and secondly in country of source of income.
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Relief from double taxation
To eliminate double taxation of such income, India has entered into Double Taxation Avoidance Agreements (DTAA) with many countries. As per DTAAs, relief from double taxation is granted in various forms, such as exemption, reduced rate, tax credit, period of stay, etc.
Under exemption, both countries agree that income of a particular kind will be taxable only in the country of residence, or in country of source or where the asset/property is located. Under reduced rate method, it is provided that same income may be taxed both in country of residence and in source country, but rate of tax in source country will not exceed a particular rate.
Similarly, in certain kind of activities (such as construction projects, service contracts, etc.), income shall not be taxed in source country if period of stay in that country does not exceed a specified time limit (90 days or 183 days), etc.
Further, Indian income tax laws also provide that in case any resident has paid taxes in any foreign country, India may grant credit of taxes so paid in foreign country, subject to maintenance of necessary documentation and conditions as may be prescribed.
It is also important to note that in case any person, who qualifies as non-resident under Indian tax laws, wants to obtain relief under respective DTAA between India and his country of residence, he must obtain Tax Residency Certificate from concerned tax authorities of his country of residence.
When an individual earns any cross-border income and intends to avail of benefits under relevant DTAA or tax credit under Indian domestic tax laws, it is very important for him to maintain some key documentation in this regard such as, details of his stay in each country supported by copy of passport, tax residency certificate from his country of residence, documents evidencing payment of taxes in each country, such as withholding tax certificates, copy of tax returns in each country, bank account statements in each country, documents to establish taxable nature of receipts, etc.
It may also be useful to seek advice of a tax professional in order to avoid any misreporting or missing out on any tax benefits.
The writer is director, direct taxation, Nangia & Co