Comprehensive Reform in International Taxation and Treaty Implementation : Clause 159 of Income Tax Bill, 2025 Vs. Section 90 of Income-tax Act, 1961

Clause 159 Agreement with foreign countries or specified territories and adoption by Central Government of agreement between specified associations for double taxation relief.

Income Tax Bill, 2025

Introduction

Clause 159 of the Income Tax Bill, 2025 represents a significant legislative development in the domain of international taxation, particularly in the context of double taxation relief, tax treaty implementation, and cross-border cooperation in tax matters. This clause seeks to consolidate, clarify, and in certain respects, expand upon the existing legal framework established under section 90 of the Income-tax Act, 1961, and the procedural requirements set out under rule 21AB of the Income-tax Rules, 1962. The underlying objective is to facilitate India's compliance with its international obligations, ensure effective relief from double taxation, and fortify the mechanisms to prevent tax evasion and avoidance in an increasingly globalized economic environment.

This commentary provides a detailed clause-wise analysis of Clause 159, evaluates its objectives and practical implications, and undertakes a comprehensive comparative assessment with the extant provisions u/s 90 and Rule 21AB. The discussion focuses on the legislative intent, interpretive nuances, compliance requirements, and anticipated challenges or ambiguities, with a view to offering a holistic understanding of the evolving statutory regime.

Objective and Purpose

The legislative intent behind Clause 159 is rooted in the need to modernize and harmonize India's approach to double taxation relief and international tax cooperation. The provision seeks to:

• Enable the Central Government to enter into tax treaties and similar arrangements with foreign countries or specified territories.
• Allow for the adoption of agreements between specified associations, reflecting the trend towards greater cooperation at institutional or industry levels.
• Codify mechanisms for relief from double taxation, avoidance of tax evasion or avoidance, exchange of information, and mutual assistance in tax recovery.
• Clarify the interplay between domestic law and treaty provisions, ensuring that the more beneficial provision applies to the taxpayer, subject to anti-abuse rules.
• Introduce precise definitions and interpretive rules for terms used in treaties, thereby reducing uncertainty and litigation.
• Mandate documentary and procedural requirements for non-residents seeking treaty relief, in alignment with global best practices and OECD recommendations.

Historically, Section 90 of the Income-tax Act, 1961 has served as the cornerstone for India's tax treaty framework, enabling the Central Government to enter into Double Taxation Avoidance Agreements (DTAAs). Rule 21AB, in turn, operationalizes the procedural aspects for claiming treaty relief, particularly in relation to the proof of residency. Clause 159, while drawing from these antecedents, introduces new features and refinements to address contemporary challenges in international taxation, including treaty shopping, tax base erosion, and the need for robust information exchange.

Detailed Analysis of Clause 159 of the Income Tax Bill, 2025 

Power of Central Government to Enter into Agreements

Clause 159(1) empowers the Central Government to enter into agreements with the government of any country or specified territory for purposes set out in sub-section (3). This mirrors Section 90(1) of the 1961 Act, which is the enabling provision for DTAAs and Tax Information Exchange Agreements (TIEAs). The inclusion of "specified territory" allows for flexibility in engaging with jurisdictions that may not be recognized as sovereign states but are relevant for tax cooperation (e.g., certain territories, dependencies, or special administrative regions).

A notable procedural aspect is the requirement for notification, which ensures transparency and legal enforceability of such agreements. This notification process is a safeguard for parliamentary oversight and public awareness.

Agreements by Specified Associations

Clause 159(2) a significant innovation in Clause 159 is the explicit recognition of agreements between "specified associations" in India and their counterparts in specified territories, subject to adoption and notification by the Central Government. This provision is not present in Section 90, which restricts the power to the Central Government alone.

The rationale is to facilitate sectoral or institutional arrangements (e.g., between professional bodies, chambers of commerce, or industry associations) that may address double taxation or tax cooperation in specific contexts. However, the Central Government retains the power to adopt and implement such agreements, ensuring that international obligations remain within the purview of sovereign authority.

Purposes of Agreements

Clause 159(3) enumerates the purposes for which agreements may be entered into:

• Relief from Double Taxation: Covers income taxed both in India and the foreign jurisdiction, or income chargeable under both laws to promote economic relations, trade, and investment. This is in line with Section 90(1)(a).
• Avoidance of Double Taxation and Anti-abuse: Expressly states that avoidance should not create opportunities for non-taxation or reduced taxation through evasion or avoidance, including treaty shopping. This aligns with the language introduced in Section 90(1)(b) post-2020 amendments, reflecting India's commitment to the OECD BEPS (Base Erosion and Profit Shifting) initiative.
• Exchange of Information: For prevention, detection, and investigation of tax evasion or avoidance, paralleling Section 90(1)(c).
• Assistance in Recovery: Mutual assistance in the recovery of taxes, mirroring Section 90(1)(d).

The clause thus encapsulates the full spectrum of modern tax treaty objectives, including substantive relief, anti-abuse measures, and procedural cooperation.

Treaty Override and Beneficial Provision

Clause 159(4) provides that where a notified agreement exists, the provisions of the Income Tax Act shall apply to the extent they are more beneficial to the assessee. This is the well-established "treaty override" principle, also found in Section 90(2). It ensures that taxpayers can avail the more favorable treatment, whether under domestic law or the treaty, subject to anti-abuse rules.

The sub-section also extends the benefit to agreements entered into by specified associations, once adopted and notified by the Central Government.

Non-discrimination in Tax Rates

Clause 159(5) clarifies that charging a foreign company, or a company incorporated in a specified territory, at a higher rate than a domestic company shall not be deemed a less favorable treatment. This is a direct codification of Explanation 1 to Section 90, reflecting the principle that differential rates based on residence or place of incorporation do not, per se, violate the non-discrimination clause found in many DTAAs.

Application of Anti-abuse Provisions

Clause 159(6) stipulates that, notwithstanding the beneficial treatment under sub-section (4), the provisions of Chapter XI shall apply even if not beneficial to the assessee. This is analogous to Section 90(2A), which mandates that the General Anti-Avoidance Rules (GAAR) in Chapter X-A of the 1961 Act override treaty benefits in cases of impermissible avoidance arrangements.

The explicit reference to Chapter XI (presumably the anti-abuse or anti-avoidance chapter in the new Bill) reinforces the primacy of anti-abuse measures over treaty relief, aligning with global trends and OECD recommendations.

Interpretation of Terms Used in Agreements

Clause 159(7) introduces a detailed hierarchy for interpreting terms used in agreements:

1. If defined in the agreement, the treaty definition prevails.
2. If not defined in the agreement but defined in the Act, the Act's definition applies, along with any explanation by the Central Government.
3. If not defined in either, the meaning assigned in a notification by the Central Government applies.
4. If still undefined, the meaning in any Central Government tax law or, failing that, any other Central Government law applies.

This multi-layered approach is more elaborate than Section 90(3) and its Explanations, which primarily provide for definitions in the Act, the treaty, and notifications. The expanded hierarchy aims to reduce interpretive disputes and litigation by providing a clear roadmap for term interpretation, with retrospective effect from the date the agreement comes into force.

Documentary Requirements for Non-residents

Clause 159(8) requires a non-resident assessee to provide:

• A certificate of residence from the relevant foreign government; and
• Such other documents and information as may be prescribed.

This is in line with Section 90(4) and (5), read with Rule 21AB, which mandate a Tax Residency Certificate (TRC) and additional prescribed information (Form 10F). The provision ensures that only genuine residents of treaty partner jurisdictions can claim treaty benefits, thereby curbing treaty shopping and abusive claims.

Definitions

Clause 159(9) defines:

• Specified association: Any institution, association, or body (incorporated or not), functioning under Indian law or the law of a specified territory, and notified by the Central Government.
• Specified territory: Any area outside India notified as such by the Central Government.

These definitions are broadly consistent with the usage in Section 90 and its Explanations, but the explicit reference to "specified associations" is a notable expansion.

Practical Implications

The practical impact of Clause 159, if enacted, will be felt across several dimensions:

• For Taxpayers: The provision preserves the right of taxpayers to claim the more beneficial of treaty or domestic law provisions, subject to anti-abuse rules. Non-residents must comply with stricter documentation requirements, including TRCs and prescribed forms, to access treaty relief.
• For Businesses: Multinational enterprises will need to ensure robust compliance mechanisms to substantiate residency and beneficial ownership, particularly in light of anti-abuse provisions and the expanded scope for information exchange.
• For the Revenue Authorities: The hierarchy of interpretive rules and the explicit override for anti-avoidance provisions empower tax authorities to challenge abusive structures and ensure that treaty benefits are not misused.
• For International Relations: The ability to enter into agreements at the association level may promote sectoral cooperation and facilitate targeted resolution of double taxation issues.
• For Legal Certainty: The multi-tiered approach to term interpretation, with retrospective application, aims to minimize disputes and bring greater predictability to cross-border tax matters.

Comparative Analysis with Section 90 and Rule 21AB

Scope and Enabling Authority

Section 90 vests the power to enter into DTAAs and TIEAs solely with the Central Government. Clause 159 retains this core principle but innovates by allowing "specified associations" to enter into agreements, subject to Central Government adoption and notification. This could enable more flexible and responsive arrangements in rapidly evolving commercial sectors, though it also raises questions about the criteria for notification and the potential for overlapping obligations.

Purposes and Objectives

Both Section 90 and Clause 159 enumerate similar purposes: relief from double taxation, avoidance of double taxation (with anti-abuse caveats), exchange of information, and mutual assistance in tax recovery. Clause 159, however, elaborates on the anti-abuse objective, explicitly referencing treaty shopping and indirect benefit to residents of third countries, reflecting recent amendments to Section 90 and India's BEPS commitments.

Beneficial Provision and Treaty Override

The principle that the more beneficial of domestic law or treaty applies is common to both Section 90(2) and Clause 159(4).

Both also provide for an override in favor of anti-abuse provisions (GAAR/Chapter X-A in Section 90(2A); Chapter XI in Clause 159(6)), underscoring the growing policy emphasis on substance over form and the prevention of tax avoidance.

Non-discrimination

Both statutes clarify that higher tax rates for foreign companies do not constitute less favorable treatment. This is codified as Explanation 1 to Section 90 and Clause 159(5), providing legal certainty in the face of non-discrimination clauses in many DTAAs.

Interpretation of Terms

Section 90(3) and its Explanations provide a three-tiered approach: treaty definition, Act definition, and notification.

Clause 159(7) expands this to a four-tiered hierarchy, adding reference to definitions in other Central Government tax laws and, failing that, other Central Government laws. This reflects an intent to exhaust all domestic legal sources before resorting to general or international meanings, thereby reducing interpretive ambiguity.

Procedural and Documentary Requirements

Section 90(4) and (5) require a TRC and prescribed information for non-residents claiming treaty relief. Rule 21AB operationalizes this by specifying Form 10F and the information to be furnished, as well as the process for Indian residents to obtain a certificate of residence.

Clause 159(8) retains these requirements, with the specifics to be prescribed by subordinate legislation, ensuring continuity and alignment with international best practices.

Role of Rule 21AB

Rule 21AB is the procedural backbone for implementing Section 90(4) and (5). It prescribes the particulars to be furnished (status, nationality, TIN, period of residence, address, etc.) and the forms to be used (10F, 10FA, 10FB). The requirement to maintain supporting documents and produce them on demand underscores the evidentiary burden on the taxpayer.

Clause 159(8) and its anticipated subordinate rules will likely mirror this framework, with possible enhancements to address evolving compliance challenges.

Specified Associations and Territories

Clause 159(9) introduces a more detailed definition of "specified association" and "specified territory," potentially broadening the scope of eligible entities and jurisdictions.

Section 90 and its Explanations refer only to "specified territory," with no explicit provision for associations. This expansion reflects the increasing complexity of international economic relations and the need for sectoral or institutional cooperation in tax matters.

Ambiguities and Potential Issues

• Criteria for Notification: The standards for notifying specified associations or territories are not fully articulated, which may lead to discretion or inconsistency in implementation.
• Overlap with Multilateral Instruments: The increasing prevalence of multilateral tax instruments (e.g., the OECD Multilateral Instrument) may create interpretive challenges where multiple treaties or agreements apply.
• Retrospective Application of Definitions: The retrospective deeming of definitions from the date of agreement may have unintended consequences for prior assessments or ongoing disputes.
• Interaction with Domestic Anti-abuse Rules: The precise scope and operation of the override for anti-abuse provisions may require judicial clarification, especially where domestic law and treaty provisions are in tension.

Conclusion

Clause 159 of the Income Tax Bill, 2025 marks a significant evolution in India's international tax regime, building on the foundations laid by section 90 of the Income-tax Act, 1961 and rule 21AB of the Income-tax Rules, 1962. The clause embodies a comprehensive approach to double taxation relief, robust anti-abuse measures, and enhanced procedural rigor. Its innovations-such as the recognition of specified association agreements, the expanded interpretive hierarchy, and the reaffirmation of anti-avoidance primacy-reflect India's commitment to global best practices and the realities of a dynamic international tax environment.

While the core principles remain consistent with the existing framework, the refinements introduced by Clause 159 are likely to have far-reaching implications for taxpayers, businesses, and tax authorities alike. As the provision is implemented, further judicial and administrative guidance may be required to address ambiguities and ensure that the objectives of fairness, certainty, and effective tax administration are achieved.

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Full Text:

Clause 159 Agreement with foreign countries or specified territories and adoption by Central Government of agreement between specified associations for double taxation relief.

 

Dated: 22-4-2025