What Is Double Taxation

Double Taxation

Double taxation is the practice of collecting taxes on the same revenue twice. Double taxation can happen in two different ways: legally and economically. You are legally required to pay both domestic and foreign taxes on any income you earn outside of India.

Double Taxation Meaning

• When income tax is paid twice on the same source of income, it is referred to as double taxation.
• When income is subject to both corporate and individual taxes, as is the situation with stock dividends, double taxation results.
• The term “double taxation” can also apply to the taxation of the same income by two distinct nations.
• Double taxation on dividends is criticized as being unfair, but proponents counter that without it, wealthy owners may essentially pay no income tax.
• When a person’s income, or a portion of it, is taxed twice in the same country while being held by two different people, this is known as economic double taxation. As an alternative, judicial double taxation occurs when the same person is subjected to two taxes on the same income earned outside of India: one abroad and one at home. A taxpayer is unfairly burdened when their income is subject to two different taxes.

What is Double taxation?

Double taxation is the term used frequently to describe the taxation of corporations and their shareholders. Shareholders of corporations, which include independent investors and corporate executives, pay taxes on dividends they get as a percentage of the business’s earnings after the firm has already paid taxes on its profits or earnings. Also, it could imply that a person or company is subject to taxation in two different countries on the same revenue.

What do you mean by double taxation?

• Corporate double taxation, which taxes corporate profits through corporate tax and dividend tax levied on dividend payouts, and international double taxation, which taxes foreign income in both the country where the income is derived and the country where an investor is a resident, are the two main types of double taxation.
• There are many approaches to reduce corporate double taxation, including legislation, structuring a corporation as a sole proprietorship, parentship, or LLC, forgoing dividend payments, and having shareholders work for the companies they control.
• Because businesses are regarded as distinct legal entities from their stockholders, double taxation frequently happens. As a result, businesses pay taxes on their yearly income just like people do. Even if the earnings that supplied the funds to pay the dividends were previously taxed at the corporate level, when businesses distribute dividends to shareholders, the dividend payments result in income-tax liabilities for the shareholders who receive them.
• Double taxation is frequently an unforeseen result of tax law. Tax authorities try to avoid it whenever feasible because it is typically viewed as a negative component of a tax system.
• Those who pay taxes are unnecessarily burdened financially by double taxation. To cease paying taxes twice on your income, you can seek for relief under Sections 90, 90A, and 91 of the Income Tax Act. You can ask to be exempt from both domestic and foreign double taxation. There are several ways to ask for aid, including:
• Relief is possible under Section 90 if India and a foreign nation have a DTAA (Double Taxation Avoidance Agreement).
• Tax reduction is available under Section 90A if there is a DTAA with a specific association.
• Relief is possible under Section 91 in the absence of a DTAA between India and a foreign nation.
• You will frequently be subject to taxation in both your home country and the place you reside if you live abroad and earn money in India. In order to prevent double taxation, India has adopted the DTAA policy.
• India enters into a tax agreement with another nation in order to prevent double taxes. An individual can avoid paying taxes twice by using this treaty. DTAAs can be either specific agreements that exclusively address particular categories of income or comprehensive agreements that include all forms of income.
• For instance, under a DTTA (Double Taxation Avoidance Agreement) between India and Singapore, income is taxed in accordance with the person’s residency status. This simplifies the taxes process and makes sure that the individual just pays one tax on the money earned outside of India. India now has DTAAs in force with more than 80 nations.
• There is a common misconception that the DTAA will enable people to completely avoid paying taxes. NRIs can lessen their tax consequences when they earn money in India because the DTAA only permits a refund, not a full deduction.

Double taxation definition

• Issues with double taxes are a common problem for multinational corporations. Income may be subject to taxation in both the country where it is earned and the country where the firm is domiciled. Sometimes the overall tax rate is so high that engaging in foreign commerce becomes prohibitively expensive.
• Countries all over the globe have ratified hundreds of agreements to prevent double taxation in order to avoid these problems, frequently using the Organization for Economic Cooperation and Development’s (OECD) model agreements as a guide (IECD). In order to increase trade between the two countries and prevent double taxation, member states to these treaties agree to minimize their taxes of foreign company.
• Double taxation on dividends is a notion that has generated a lot of discussion. While some complain that because these funds were already subject to corporate tax, taxing shareholders on their distributions is unfair, others believe this tax structure is reasonable.
• Double taxation proponents point out that if dividends weren’t taxed, affluent people could live well off the dividends they received from holding a lot of common stock while paying virtually no personal income taxes. In other words, stock ownership might develop into a tax shelter. Advocates of dividend taxation further point out that firms choose whether or not to pay dividends to shareholders, therefore they are not forced to have their income “twice taxed” until they do so.

What is an example of double taxation

• Let’s use a corporation that makes $1 million in earnings as an example. It keeps $500,000 in earnings and distributes $500,000 in dividends to its shareholders. As a shareholder, Joe gets dividends of $10,000. Joe must also pay tax on the $10,000 in income at his personal tax rate in addition to the 21% corporate tax that the corporation paid on the $1 million.
• As an employee, a corporation owner may get a salary or wages, and this salary is also subject to taxation at the individual’s standard personal income tax rate. The owner is a shareholder as well, therefore any dividends received are subject to taxation. A shareholder’s personal tax rate is also applied on the majority of dividends.
• For instance, under a DTTA (Double Taxation Avoidance Agreement) between India and Singapore, income is taxed in accordance with the person’s residency status. This simplifies the taxes process and makes sure that the individual just pays one tax on the money earned outside of India. India now has DTAAs in force with more than 80 nations.
• There is a common misconception that the DTAA will enable people to completely avoid paying taxes. NRIs can lessen their tax consequences when they earn money in India because the DTAA only permits a refund, not a full deduction.