Understanding Section 90(4) of the Income Tax Act: A Complete Guide to Claiming Relief Under DTAA

India has entered into several Double Taxation Avoidance Agreements (DTAAs) with other countries to provide relief to taxpayers from paying taxes on the same income in multiple jurisdictions. However, to avail of these benefits, certain conditions must be met. Section 90(4) of the Income Tax Act, 1961 lays down specific rules for non-residents who wish to claim tax relief under DTAA. In this blog, we will explore what Section 90(4) entails, the importance of obtaining a Certificate of Residency, and how this impacts non-resident taxpayers.

What is Section 90(4) of the Income Tax Act?

Section 90(4) of the Income Tax Act, 1961 provides guidelines for non-resident taxpayers to claim relief under a DTAA. It specifically states:

“An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate of his being a resident in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory.”

In simpler terms, if a non-resident individual or entity wishes to claim tax benefits under a DTAA with India, they must first provide a Certificate of Residency (CoR) from the government of the country or territory where they reside. Without this certificate, they are ineligible to claim relief.

Why is Section 90(4) Important?

The objective of Section 90(4) is to ensure that only genuine residents of the countries with which India has signed DTAAs can claim tax benefits. This provision helps to curb tax avoidance practices, where individuals or entities might falsely claim to be residents of another country to reduce their tax liability in India.

By mandating the Certificate of Residency, Section 90(4) ensures transparency and encourages genuine taxpayers to take advantage of the provisions of the DTAA, ultimately providing relief from double taxation.

What is a Certificate of Residency?

A Certificate of Residency (CoR) is a document issued by the tax authorities of a country that certifies an individual or entity as a resident for tax purposes. For non-residents seeking DTAA benefits in India, this certificate is essential. It confirms that the taxpayer is liable to tax in their country of residence, thereby qualifying them for relief under the DTAA provisions.

For example, if a non-resident Indian (NRI) based in the USA wants to claim reduced withholding tax on dividends from Indian stocks, they must present a CoR from the US government to the Indian tax authorities.

How to Obtain a Certificate of Residency

To claim tax relief under the DTAA, non-resident taxpayers must follow these steps to obtain a Certificate of Residency:

1. Identify the Relevant Tax Authority: Non-residents should approach the tax authority in their country of residence. For example, in the USA, the CoR is issued by the Internal Revenue Service (IRS).
2. Submit the Required Documents: Different countries may have varying documentation requirements for issuing a CoR. Typically, taxpayers need to submit proof of residency, such as a lease agreement, utility bills, or any other document proving their permanent address.
3. Receive the CoR: Once the application is processed, the taxpayer will receive the Certificate of Residency, which they can use to claim relief under DTAA provisions in India.
4. Submit the CoR in India: Non-resident taxpayers must submit the CoR to the Indian tax authorities when filing their tax returns or at the time of claiming any DTAA benefits.

Why You Need the CoR to Claim DTAA Benefits

Without a Certificate of Residency, a non-resident taxpayer cannot avail of the reduced tax rates or exemptions under the DTAA. This may lead to double taxation, where the same income is taxed both in India and in the country of residence.

For example, without the CoR, a non-resident Indian receiving interest income from an Indian bank could be subject to a 30% tax rate in India. However, if they provide a CoR from their country of residence (say the USA), the tax rate may be reduced to 15% as per the DTAA between India and the USA.

DTAA Benefits Under Section 90(4)

Under the provisions of a DTAA, non-resident taxpayers may avail of several benefits:

• Reduced Withholding Tax: DTAAs often provide for reduced withholding tax rates on income such as dividends, royalties, interest, and capital gains.
• Avoidance of Double Taxation: DTAAs ensure that the same income is not taxed twice — once in India and again in the country of residence.
• Exemptions: Some DTAAs provide for complete exemptions from taxation on certain types of income, depending on the country’s tax laws.

Impact of Not Complying with Section 90(4)

If a non-resident fails to comply with Section 90(4) by not obtaining a Certificate of Residency, they will lose their eligibility to claim benefits under the DTAA. This could result in:

• Higher Tax Rates: Non-residents would be subject to the standard tax rates applicable in India without the benefit of lower rates under the DTAA.
• Double Taxation: They may end up paying taxes on the same income in both India and their country of residence, leading to an increased tax burden.
• Non-Compliance Penalties: Not adhering to Section 90(4) could also invite penalties for non-compliance under Indian tax laws.

FAQs on Section 90(4) of the Income Tax Act

1. Who needs to obtain a Certificate of Residency under Section 90(4)? Any non-resident taxpayer who wishes to claim relief under a Double Taxation Avoidance Agreement (DTAA) with India must obtain a Certificate of Residency from their country of residence.

2. Can I claim DTAA benefits without a Certificate of Residency? No, you must submit a Certificate of Residency to claim any relief under the DTAA. Without it, you will not be entitled to the reduced tax rates or exemptions.

3. How often do I need to obtain a Certificate of Residency? You need to obtain a Certificate of Residency for every financial year in which you intend to claim DTAA benefits.

4. What happens if I don’t submit the Certificate of Residency? If you don’t submit the Certificate of Residency, you will be taxed at the regular rates in India, and you may also be subject to double taxation on your income.

Conclusion

Section 90(4) of the Income Tax Act plays a crucial role in preventing the misuse of DTAAs while ensuring genuine taxpayers get the relief they deserve. Non-residents looking to claim tax benefits must obtain a Certificate of Residency from their home country to prove their eligibility. By complying with this requirement, non-residents can effectively minimize their tax liability and avoid the burden of double taxation.

If you are a non-resident and need help understanding how to claim DTAA benefits or need assistance with tax compliance, feel free to contact our team of experts at SmartTaxSaver.