What is double taxation?
If you are wondering what is double taxation? It is a tax principle associated with double income tax on a similar source of income. It can happen if your income gets taxed at corporate and individual levels. If the identical income gets taxed in two separate countries, then international trade or investment will also get double taxed. It can happen with a 401k credit.
How does double taxation work?
Double taxation often transpires because a company is considered a legal entity separate from its stockholders. As a result, businesses and individuals pay expenses on their annual income. When a company pays dividends to shareholders, the income from cash to pay the dividends gets already taxed at the company level. The payment of those dividends gets accompanied by an income tax liability to the shareholders who receive it.
Double taxation is usually an unintended result of tax law. It gets generally regarded as a repugnant component of the tax system, and tax authorities try to avoid it as much as possible.
Most tax arrangements use different tax rates and tax credits to create a multicultural system in which income generated by a company and paid as dividends and income directly produced by an individual get ultimately taxed at the same rate.
How can it be prevented?
While it is limited that individual taxpayers can do to avoid double taxation. The Income Tax Act gives specific provisions to help individuals who are likely to be double-taxed on their income. This remedy gets based on the Double Taxation Prevention Agreement (DTAA).
The Double Taxation Treaty is a double taxation treaty that India concludes with other countries. By using the provisions of this Convention, one can avoid double taxation. DTAA is either a comprehensive contract covering all types of income or a specific contract covering only certain types of income.
It means that natural persons receiving income from other nations can minimize their tax obligations and avoid double taxation by using the remedies given by the DTAA provisions and the Income Tax Act.