Future of Unilateral Agreement relief in India : Clause 160 of the Income Tax Bill, 2025 Vs. Section 91 of the Income-tax Act, 1961

Clause 160 Countries with which no agreement exists.

Income Tax Bill, 2025

Introduction

Double taxation of income, where the same income is taxed in more than one jurisdiction, presents a significant challenge in cross-border taxation. To address this, countries enter into Double Taxation Avoidance Agreements (DTAAs). However, in cases where no such agreement exists between India and the foreign country, domestic law provisions become crucial in providing relief to taxpayers. Clause 160 of the Income Tax Bill, 2025 and Section 91 of the Income-tax Act, 1961 serve this very purpose, offering unilateral relief from double taxation in the absence of a DTAA.

This commentary provides a detailed analysis of Clause 160 of the Income Tax Bill, 2025, examining its objectives, structure, and implications. It then undertakes a comprehensive comparative analysis with Section 91 of the Income-tax Act, 1961, highlighting similarities, differences, and the evolution of India's approach to unilateral double taxation relief.

Objective and Purpose

The legislative intent behind both Clause 160 and Section 91 is to mitigate the adverse effects of double taxation for Indian residents and certain non-residents in situations where no bilateral tax treaty exists. The provisions are designed to promote fairness in taxation, prevent economic double jeopardy, and encourage cross-border economic activity by ensuring that Indian taxpayers are not unduly burdened by overlapping tax claims from two sovereign jurisdictions.

Historically, the inclusion of unilateral relief mechanisms in Indian tax law reflects a policy commitment to align with international best practices and the recommendations of organizations such as the United Nations and the Organisation for Economic Co-operation and Development (OECD). The relief is unilateral because it is granted solely on the basis of Indian law, without requiring reciprocity from the other country.

Detailed Analysis of Clause 160 of the Income Tax Bill, 2025

1. Scope and Applicability

Clause 160 applies in respect of income accruing or arising outside India during a tax year to:

• Indian residents who have paid income-tax in a country with which there is no agreement u/s 159 (the corresponding DTAA provision in the new Bill).
• Non-residents assessed on their share in the income of a registered firm resident in India, where such share includes income accruing or arising outside India and taxed in a country with which no agreement exists.

The relief is available only for income that is not deemed to accrue or arise in India, thereby excluding income that, though sourced abroad, is treated as Indian-sourced under domestic law.

2. Quantum and Method of Relief

The deduction from Indian income-tax is calculated on the doubly taxed income as follows:

• At the Indian rate of tax or the rate of tax of the foreign country, whichever is lower; or
• At the Indian rate of tax if both rates are equal.

This ensures that the taxpayer does not receive relief exceeding the lower of the two applicable rates, which is consistent with the principle of preventing double, but not less-than-single, taxation.

3. Relief for Non-Residents in Registered Firms

Clause 160(2) extends the relief to non-residents who are assessed on their share in the income of a registered firm resident in India, provided the share includes income taxed abroad. The calculation of relief mirrors that for residents, ensuring parity of treatment.

4. Definitions and Explanations

Clause 160(3) provides critical definitions:

• Income-tax in relation to any country includes excess profits tax or business profits tax charged by a government or local authority.
• Indian income-tax refers to tax charged under the current Act.
• Indian rate of tax is the rate after deducting any reliefs under the Act (except for the relief under this section) divided by total income.
• Rate of tax of the said country refers to the actual tax paid abroad (including super-tax), after reliefs but before any double taxation relief, divided by the assessed income in that country.

These definitions are crucial for ensuring uniform calculation and preventing interpretational disputes.

5. Procedural Requirements

Clause 160 requires the taxpayer to prove that tax has been paid in the foreign country. Typically, this would involve furnishing tax payment certificates or other documentary evidence, a requirement that aligns with global practices for claiming foreign tax credits.

6. Exclusions and Limitations

The relief is not available where a DTAA exists (covered u/s 159). The provision also applies only to income not deemed to accrue or arise in India, preventing overlap with other anti-avoidance or source rules.

Practical Implications

1. For Resident Taxpayers

Residents earning foreign income from countries without a DTAA benefit from a statutory mechanism to avoid double taxation. This is particularly relevant for professionals, businesspersons, and investors with global operations, as well as for multinational enterprises with Indian headquarters.

The requirement to choose the lower of the two rates ensures that taxpayers are not incentivized to shift income to low-tax jurisdictions solely for relief purposes, thus protecting the Indian tax base.

2. For Non-Resident Partners in Indian Firms

Non-residents assessed on their share of income from Indian registered firms, which includes foreign income taxed abroad, are also protected from double taxation. This provision supports cross-border partnerships and joint ventures, enhancing India's attractiveness as a business hub.

3. Compliance and Documentation

Claiming relief under Clause 160 will require robust documentation, including foreign tax payment proofs, computation of foreign and Indian tax rates, and careful allocation of income. Taxpayers may face practical challenges in obtaining foreign tax documentation, particularly from jurisdictions with less developed tax administrations.

4. Revenue Implications and Policy Considerations

While the provision is taxpayer-friendly, it may lead to a reduction in Indian tax revenues in certain cases. However, this is balanced against the policy objective of preventing double taxation, which is essential for economic growth and international competitiveness.

Comparative Analysis: Clause 160 of the Income Tax Bill, 2025 and Section 91 of the Income-tax Act, 1961

1. Structural Parity

Both Clause 160 and Section 91 are structurally similar and serve the same fundamental purpose: granting unilateral double taxation relief in the absence of a DTAA. They both:

• Apply to residents with foreign income taxed abroad, and to non-residents assessed on their share in Indian registered firms with foreign income.
• Limit the relief to the lower of the Indian or foreign tax rates (or the Indian rate if both are equal).
• Define critical terms such as "income-tax," "Indian income-tax," "Indian rate of tax," and "rate of tax of the said country."
• Require proof of foreign tax payment.

2. Notable Differences

• Reference to DTAAs:
  • Section 91 refers to the absence of an agreement u/s 90 of the 1961 Act (the DTAA section), while Clause 160 refers to section 159 of the 2025 Bill (the corresponding DTAA provision). This is a structural update reflecting the new legislation but not a substantive change.
• Special Provision for Income from Pakistan:
  • Section 91(2) contains a specific provision for relief in respect of tax paid in Pakistan on agricultural income, allowing deduction of the amount of tax paid or a sum calculated at the Indian rate, whichever is less. This reflects historical and geopolitical considerations unique to India's relationship with Pakistan. Notably, Clause 160 omits this special provision, suggesting a move towards uniform treatment of all countries without DTAAs and a possible shift in policy focus.
• Order and Wording of Subsections:
  • Clause 160 organizes the relief for non-resident partners in registered firms as subsection (2), whereas Section 91 places this in subsection (3). While this is a minor structural change, it may reflect an attempt to streamline the provision.
• Definitions:
  • Both provisions contain nearly identical definitions of key terms. However, Clause 160 presents these definitions together in subsection (3), while Section 91 presents them as an Explanation at the end. The substance remains unchanged, but the new Bill may provide greater clarity and readability.
• Reference to "Super-tax":
  • Section 91's definition of "rate of tax of the said country" includes "income-tax and super-tax actually paid." Clause 160 retains this approach but clarifies the inclusion of excess profits tax or business profits tax. The reference to super-tax is more relevant historically but less so in the modern context, as super-tax has generally been subsumed by income-tax in most jurisdictions.
• Terminology and Modernization:
  • Clause 160 refers to "tax year" and "this Act," reflecting updated terminology consistent with the new Bill's structure. Section 91 uses "previous year" and references to the 1961 Act.

3. Policy Evolution

The omission of the special provision for Pakistan in Clause 160 signals an intent to treat all countries without DTAAs equally, moving away from legacy carve-outs. This aligns with modern international tax policy, which emphasizes neutrality and uniformity.

The overall structure of Clause 160 suggests a focus on clarity, consolidation, and modernization, while preserving the core relief mechanism established in Section 91.

4. Ambiguities and Potential Issues

• Proof of Tax Payment: Both provisions require the taxpayer to prove foreign tax payment. However, neither specifies the exact nature of evidence required, leaving room for administrative discretion and potential disputes.
• Calculation Complexities: The computation of "rate of tax of the said country" can be complex, especially where foreign tax systems differ significantly from India's. Issues may arise in allocating relief where foreign taxes are imposed on a consolidated basis or where foreign tax years do not align with the Indian tax year.
• Excess Profits/Business Profits Tax: The inclusion of these taxes in the definition of "income-tax" may cause interpretational challenges if the foreign tax is not directly analogous to Indian income-tax.
• Interaction with Other Reliefs: Both provisions specify that the Indian rate of tax is calculated after deduction of other reliefs under the Act but before deduction of relief under the relevant section. This sequencing can affect the quantum of relief and may require careful computation.

Comparative Perspective with International Practice

India's approach to unilateral double taxation relief is broadly consistent with international norms. Many countries, including the UK and Australia, provide unilateral relief for foreign taxes paid in non-treaty countries, typically limited to the lower of the domestic or foreign tax rate. The requirement to prove foreign tax payment and the method for rate calculation are also aligned with global standards.

However, some jurisdictions allow for carry-forward or carry-back of unutilized foreign tax credits, a feature not present in either Clause 160 or Section 91. The absence of such provisions in Indian law may disadvantage taxpayers with fluctuating income or tax rates.

Conclusion

Clause 160 of the Income Tax Bill, 2025, represents a largely faithful modernization of Section 91 of the Income-tax Act, 1961, preserving the essential structure and intent of unilateral double taxation relief. The principal changes are structural and terminological, aimed at greater clarity and alignment with the new legislative framework.

The omission of the Pakistan-specific provision and the uniform treatment of all non-treaty countries reflect a shift towards greater neutrality and simplification. While the core relief mechanism remains robust, practical challenges in documentation, computation, and administration persist, and may warrant further guidance or regulatory clarification.

As India continues to deepen its integration with the global economy, the relevance of such unilateral relief provisions may diminish with the expansion of the DTAA network. Nonetheless, their continued presence in domestic law is essential for protecting taxpayers in non-treaty scenarios and upholding the principles of equity and neutrality in international taxation.

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Full Text:

Clause 160 Countries with which no agreement exists.

 

Dated: 23-4-2025