What is Double Taxation and How to Avoid it?

Taxation forms an important part of the revenue stream for the government, but there are some cases when the income from the same source is taxed by the government twice before translating into net income. However, with proper knowledge of how the taxation works, this inherent flaw in the revenue system can be successfully avoided.

What Does Double Taxation Mean?

Double taxation is a phenomenon wherein the tax liability is considerably increased due to the imposition of taxes at different levels and distinct rates even though these incomes have come from a single source. In double taxation, the income can be legitimately taxed twice both at the corporate and personal level or when the income is generated by a citizen employed outside the country.

Different Forms of Double Taxation?

As already seen, there are two forms of double taxation.

International Double Taxation - As per international tax law, every country has the right to tax its residents employed in the country as well as the citizens employed outside the country. So, a taxpayer working in a foreign country may have to pay taxes twice. However, the Double Tax Avoidance Agreements (DTAA), signed bilaterally, usually takes care of this double burden.

Corporate Double Taxation – Here, the company has to pay their corporate tax liability when it earns profit and when these companies pay dividends to its corresponding shareholders or the owners, the incomes again attract tax obligations.

How Does Corporate Double Taxation Work?

This flaw of double taxation is mostly visible in the corporate set up, where the profits from the company are duly taxed as per the corporate tax slabs while the dividends distributed are taxed under the income tax slabs. Basically, it is the same profit that has been charged twice. This unintended consequence of tax legislation is true for both smaller and larger organisations.

There is also a case where owners are the shareholders of the company, wherein they will have to pay for the dividend they receive from the profits as well as the income tax levied on them as per their tax bracket.

How to Avoid Double Taxation?

When it comes to smaller organisations, the shareholders can be declared as employees and the dividend generated can be paid to them in the form of salary, which is tax-deductible. Nevertheless, large organisations can also be able to avoid it successfully by making their shareholders either a consultant or a member of the board depending upon their shares.

For an NRI to avoid double taxation, one would need to submit Tax residency certificate and other documents as required by the Banks or the Brokers.

The Income Tax rules get modified regularly, and every business has unique needs. This makes Double Taxation in the corporate sector an ever-changing domain. It is advisable to confer with your CPA and Tax Attorneys to understand the intricacies and find a solution best suited for you.


DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.