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Taxpayers must disclose income derived from foreign source
September, 13th 2008

The growing spate of overseas acquisitions and increasing incomes for Indian residents from foreign jurisdictions has prompted the Central Board of Direct Taxes (CBDT) to set the record straight on disclosure and taxability of such incomes.

Resident taxpayers are now required to disclose in their income tax returns all incomes derived in treaty countries and where such income may be taxed.

Such foreign source incomes have to be included in the total income chargeable to tax in India, but the Indian resident would be allowed to avail himself relief of double taxation through the elimination method or any other method specified in the DTAA (Double Taxation Avoidance Agreements), according to a CBDT notification issued here.

This is a clarificatory notification. It provides a formal mechanism to allow double taxation relief for taxes paid abroad (in treaty countries). So far, the relief was being given on the basis of treaty. There were arguments in certain quarters that there was nothing specific in the Indian law to allow the relief, Mr Uday Ved, Head of Tax and Regulatory Services, KPMG told Business Line.

He highlighted that most of the DTAAs that India had entered relieve double taxation through the credit method.

Taxation methods

There are two kinds of double taxation relief unilateral relief and bilateral relief. When two countries negotiate an agreement for providing double taxation relief, such relief is provided through DTAA and is known as bilateral relief. A DTAA seeks to eliminate double taxation through exemption method (also known as elimination) or credit method.

In credit method, the residence country grants credit for taxes paid by its resident in the source country. In exemption method, the residence country exempts the income that has arisen in the source country. The exemption of income may be subject to compliance of certain conditions by the taxpayer.

The CBDTs clarificatory notification will improve disclosures by resident taxpayers to the tax department and ensure levy of appropriate tax in India, in respect of their global incomes. Residents are taxable in India for their global incomes, Mr G. Ramaswamy, Central Council member of the Institute of Chartered Accountants of India (ICAI) said.

He noted that employees sent abroad by Indian companies and continuing to be a resident here had disputes with assessing officers on admissability of tax deducted from the salaries paid abroad.


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