International Taxation

International Taxation Under the Income Tax Act: Expert Guidance for Cross-Border Taxation

The Income Tax Act, 1961 (India), governs the taxation of individuals, companies, and other entities in India. When it comes to international taxation, the provisions within the Act are critical for businesses and individuals engaged in cross-border transactions. India has a complex tax system when dealing with international income and investments, and understanding how Indian tax laws interact with global taxation frameworks is essential for tax compliance and optimization.

At Kishor Singh and Co & Company, we specialize in helping businesses and individuals navigate the intricate aspects of international taxation under the Income Tax Act. Our team of Chartered Accountants provides comprehensive tax planning, advisory, and compliance services to help you manage tax liabilities efficiently while maximizing available tax benefits.

Key Provisions of International Taxation Under the Income Tax Act

  • Taxability of Global Income: As per Section 5 of the Income Tax Act, residents of India are taxed on their global income, meaning that all income, whether earned in India or abroad, is subject to Indian tax laws. However, non-residents are taxed only on their Indian income (income received or deemed to be received in India or income accruing or arising in India).
    • Residential Status: The residential status of an individual or entity is crucial in determining whether they are taxable on global income or only on Indian income. This is governed by the provisions in Section 6 of the Income Tax Act.
  • Double Taxation Relief: India has entered into Double Taxation Avoidance Agreements (DTAAs) with various countries to prevent the same income from being taxed twice. Under these treaties, the income may be taxed in either India or the foreign country, or both, with provisions for tax relief to reduce the overall tax burden.
    • Section 90 and Section 91 of the Income Tax Act govern the provisions related to DTAAs, and they provide the mechanisms to claim relief from double taxation through exemptions, tax credits, or reduced tax rates on income earned in a foreign country.
  • Transfer Pricing: Transfer pricing refers to the pricing of transactions between related entities (such as parent and subsidiary companies) across borders. The Income Tax Act mandates that transactions between associated enterprises be conducted at arm's length prices, ensuring that profits are appropriately allocated between jurisdictions.
    • Section 92 of the Income Tax Act and the Transfer Pricing Regulations require taxpayers to maintain transfer pricing documentation and comply with the rules to avoid disputes and penalties.
  • Withholding Tax on Cross-Border Payments: India imposes withholding tax on certain cross-border payments such as dividends, interest, royalties, and fees for technical services. The rate of withholding tax varies depending on the nature of the payment and the provisions of applicable DTAAs.
    • Section 195 of the Income Tax Act mandates that any person making a payment to a non-resident must withhold tax at the applicable rate before remitting the amount. This is an important compliance requirement for businesses involved in international transactions.
  • Taxation of Non-Residents: Non-resident individuals or entities earning income in India are subject to tax on income derived from Indian sources. Additionally, special provisions under the Income Tax Act apply to non-resident Indians (NRIs), especially regarding income from investments, property, and pensions.
    • Section 115A and other provisions deal with the taxation of non-residents (including NRIs), specifying the tax rates on interest, royalties, and dividends.
    • Here are the transfer pricing methods used in India under the Income Tax Act:
      • Comparable Uncontrolled Price (CUP) Method: Preferred when comparable data is readily available for similar transactions between independent parties.
      • Resale Price Method: Used when the entity is reselling goods or services without significant modifications.
      • Cost Plus Method: Suitable when one entity is providing services or goods based on its cost.
      • Profit Split Method: Applied for complex transactions involving multiple parties with shared contributions to a single product or service.
      • Transactional Net Margin Method (TNMM) : Often used when other methods are not applicable or when there is difficulty in identifying comparable uncontrolled transactions.
  • Foreign Income Disclosure and Compliance: Indian taxpayers are required to disclose foreign income and assets under the Income Tax Act. Non-compliance with the foreign income reporting provisions can attract heavy penalties and interest.
    • Schedule FA of the Income Tax Return (ITR) form requires the reporting of foreign bank accounts, foreign assets, and income earned outside India.
  • Repatriation of Funds and Foreign Tax Credit: In cases where foreign taxes are paid on income earned abroad, Indian taxpayers may be eligible for a foreign tax credit (FTC) under the provisions of the Income Tax Act. This ensures that income is not taxed twice—once in the foreign country and again in India.
    • Section 91 provides relief for taxpayers who are not covered by a DTAA but have paid taxes on foreign income.
  • Expatriate Taxation in India: India’s tax laws also include specific provisions for expatriates working in India. Taxation is based on the individual's residential status, which determines whether they are subject to tax on their global income or only on their Indian income.
    • Expatriates may also be entitled to certain tax exemptions or concessions under the Income Tax Act, such as exemptions on salaries or benefits under Section 10.