BASIC CONCEPTS OF INTERNATIONAL

TAXATION
What is International Taxation?

Taxation of cross-border transactions

A transaction between two or more persons in
two or more tax jurisdictions; or

A transaction involving a person in one tax

jurisdiction with property or income flows in
another tax jurisdiction
There are two basic principle followed by
different countries in International taxation:
Residence Based Taxation: The principle of
residence-based taxation asserts that natural
persons or individuals are taxable in the country or
tax jurisdiction in which they establish their
residence or domicile, regardless of the source of
income. India follows residence based taxation in

Source
Based
Taxation:
There
are
individuals/entities whose "residence" is in
one country but their business is actually
carried on in another country and their
income is earned in the latter country. In such
cases, the principle of residence-based
taxation would be inappropriate. Therefore,
there is a view that the country which
provides the opportunity and facilities to
generate income or profits should also have
the right to tax the same. This forms the
underlying basis of the principle of sourcebased taxation of income. India follows source
based taxation in case of non-resident

Concept of Double Taxation: Double Taxation of

the same income in the hands of same entity would
give rise to harsh consequences and impair economic
development. Double Taxation Agreements between
two countries therefore aim at eliminating or
mitigating the incidence of double taxation.
Concept
of
Double
Taxation
Avoidance
Agreement: Double tax treaties comprise of
agreements between two countries, which, by
eliminating international double taxation, promote
exchange of goods, persons, services and investment
of capital. These are bilateral economic agreements
where the countries concerned evaluate the
sacrifices and advantages which the treaty brings for
each contracting state, including tax forgone and
compensating economic advantages.

Classification of DTAA:
On the basis of scope:
a)
Comprehensive Double Taxation
Agreements- They provide for taxes on
income, capital gains, etc. Comprehensive
agreements ensure that the taxpayers in both
the countries would be treated equally and on
equitable basis, in respect of the problems
relating to double taxation.
b) Limited Double Taxation Agreements
They refer only to income from shipping and
air transport, or estates, inheritance and gifts.

 On the basis of parties to Treaties:

a) Bilateral Treaties- DTAA entered between two
countries.
b)Multilateral Treaties- DTAA entered between a
group of countries e.g. convention between Nordiac
countries including Denmark, Finland, Iceland Norway
and Sweden.
Treaty Position in India
Tax treaties merely eliminate double taxation. A tax
treaty cannot per se levy tax.
The tax payer has an option to opt for the provisions
of the Act or the tax treaty, whichever is more
beneficial
Section 90(2) of the Act
Circular No 333
CIT vs. Visakhapatnam Port Trust (144 ITR 146)

 Provisions of the tax treaty override the Act

Union of India vs Azadi Bachao Andolan (263
ITR 706) (SC)
CIT vs PVAL Kulandagan Chettiar (267 ITR

However under the proposed DTC (Direct

Tax Code) there is a provision, which says
that Treaty or Act, whichever is enacted
later in point of time will prevail over the
other. The buzz inside the taxation circle is
that all the treaties will be re-enacted after
the DTC, thereby helping the treaty
override the DTC.

Different Models of Tax Treaties

OECD [The Organization for Economic Co-operation and
Development] model- Emphasis on residence based
taxation. Developed countries adopted this model in case of
treaties with other developed countries. Started from 1963
draft convention, followed by Regularly updated /amended.
UN Model- Emphasis on Source based taxation. Developed
countries adopted this model in case of treaties with
developing countries or between two developing nations. OECD
Model convention has been used as a main reference
document.
US Model- Used by USA for all treaty negotiations. This model
had influence on existing Treaty between India & US. OECD
Model convention has been used as a main reference
document.

Taxes in India:
They are levied by the Central Govt. and State Govt.
and some taxes are levied by the local authorities
such as Municipality.
The authority to levy tax is derived from the
Constitution of India.
Art.265 states that No tax shall be levied or collected
except by the authority of law.
Art. 246 distributes legislative powers including
taxation between the Parliament of India and the State
Legislature. Sch.VII enumerates the subject matters
under three Lists:
List I entailing the areas on which only the
Parliament is competent to make laws;
List II entailing the areas on which only the State
Legislature can make laws; and

 List III listing the areas on which both the Parliament

and the State Legislature can make laws upon
concurrently.
Central Government of India:[Parliament of India]
(13 heads)
Taxes on income other than agricultural income (List I,
Entry 82)
Duties of customs including export duties (List I, Entry
83)
Duties of excise on tobacco and other goods
manufactured or produced in India except (i) alcoholic
liquor for human consumption; and (ii) opium, Indian
hemp and other narcotic drugs and narcotics, but
including medicinal and toilet preparations containing
alcohol or any substance included in (ii)[List I, Entry 84]

 Corporation Tax (List I, Entry 85)

Taxes on capital value of assets, exclusive of
agricultural land, of individuals and companies,
taxes on capital of companies (List I, Entry 86)
Estate Duty in respect of property other than
agricultural land (List I, Entry 87)
Duties in respect of succession to property
other than agricultural land (List I, Entry 88)
Terminal taxes on goods or passengers, carried
by railway, sea or air, taxes on railway fares and
freight (List I, Entry 89)
Taxes other than stamp duties on transactions
in stock exchanges and futures markets (List I,
Entry 90)

 Taxes on the sale or purchase of newspapers and on

advertisements published therein (List I, Entry 92)
Taxes on sale or purchase of goods other than
newspapers, where such sale or purchase takes place in
the course of inter-State trade or commerce (List I,
Entry 92A)
Taxes on the consignment of goods in the course of
inter-State trade or commerce (List I, Entry 93A)
All residuary types of taxes not listed in any of the three
lists (List I, Entry 97)
State Governments (State Legislature) (19 heads):
Land revenue, including the assessment and collection
of revenue, the maintenance of land record, survey for
revenue purposes and records of rights, and alienation
of revenues (List II, Entry 45)

 Taxes on agricultural income (List II, Entry 46)

Duties in respect of succession to agricultural
income (List II, Entry 47)
Estate duty in respect of agricultural income
(List II, Entry 48)
Taxes on lands and buildings (List II, Entry 49)
Taxes on mineral rights (List II, Entry 50)
Duties
of
excise
for
following
goods
manufactured or produced within the State (i)
alcoholic liquors for human consumption; and
(ii) opium, Indian hemp and other narcotic
drugs and narcotics (List II, Entry 51)

 Taxes on entry of goods into a local area for

consumption, use or sale there (see Value Added
Tax) (List II, Entry 52)
Taxes on the consumption or sale of electricity (List
II, Entry 53)
Taxes on the sale or purchase of goods other than
newspapers (List II, Entry 54)
Taxes on advertisements other than advertisements
published in newspapers and advertisements
broadcast by radio or television (List II, Entry 55)
Taxes on goods and passengers carried by roads or
on inland waterways (List II, Entry 56)
Taxes on vehicles suitable for use on roads (List II,
Entry 57)

 Taxes on animals and boats (List II,

Entry 58)
Tolls (List II, Entry 59)
Taxes on profession, trades, callings
and employments (List II, Entry 60)
Capitation Taxes (List II, Entry 61)
Taxes on luxuries, including taxes on
entertainments, amusements,
betting and gambling (List II, Entry
62)
Stamp duty (List II, Entry 63)

 Income Tax Department functions under the

Department of Revenue in Ministry of Finance.
It is responsible for administering the following
direct taxation Acts passed by Parliament of India:

Income Tax Act;

Wealth Tax Act;
Gift Tax Act;
Expenditure Tax Act;
Interest Tax Act;
Various Finance Acts (Passed every year in Budget
Session)

Income Tax Dept. is also responsible for enforcing

Double Taxation Avoidance Agreements and deals
with various aspects of international taxation such
as Transfer Pricing.

Central Board of Direct Taxes (CBDT)

It is a part of Dept. of Revenue in the Ministry
of Finance, Govt. of India.
It provides essential inputs for policy and
planning of direct taxes in India.
It is responsible for administration of the direct
tax laws through IT Dept.
The CBDT is a statutory authority functioning
under the Central Board of Revenue Act, 1963.
The Central Board of Revenue as the
Department Apex body charged with the
administration of taxes came into existence as
a result of the Central Board of Revenue Act,
1924.

 Initially the Board was in charge of both direct

and indirect taxes.
When the administration of taxes became too
unwieldy for one Board to handle, the Board
was split up into two , namely the Central
Board of Direct Taxes and Central Board of
Excise and Customs w.e.f 1.1.1964.
This bifurcation was brought about by
Constitution of the two Boards u/s. 3 of the
Central Boards of Revenue Act, 1963.
Organizational Structure of CBDT:
The CBDT is headed by Chairman and also
comprises six members, all of whom are
Special Secretary to Govt. of India.

 Member (Income Tax)

Member (Legislation and
Computerization)
Member (Revenue)
Member (Personnel & Vigilance)
Member (Investigation)
Member (Audit & Judicial)

CBDT Chairman and Members of

CBDT are selected from Indian
Revenue Service (IRS)

Meaning of Tax Evasion, Tax Avoidance & Tax

Planning - There are legitimate ways to reduce taxes
through proper tax planning and such methods
arealways encouraged. But unfortunately, there is also a
tendency to reduce tax through illegal methods. They
are not accepted practice and can invite problems.
There are three methods which are commonly used by the
taxpayers to reduce their tax liabilities Tax Evasion,
Tax Avoidance; and
Tax Planning
Tax Evasion:
Dishonest taxpayers try to reduce their taxes by
concealing income, inflation of expenses, falsification
ofaccounts and willful violation of the provisions of the
Income-tax Act. Such unethical practices oftencreate
problems for the tax evaders.

Tax department not only imposes huge penalties but

also initiateprosecution in such cases.

Tax Avoidance:
Tax avoidance is minimizing the incidence of tax
by adjusting the affairs in such a manner that
althoughit is within the four corners of the laws,
it is done with a purpose to defraud the revenue.
It is the act ofdodging without directly breaking
the law.
Tax Planning:
Tax planning is arrangement of financial activities
in such a way that maximum tax benefits, as
provided inthe income-tax act are availed of. It
envisages use of certain exemption, deductions,
rebates and reliefsprovided in the Act.