Countries with which no agreement exists.

160(1)

If any person who is resident in India in any tax year proves that, in respect of his income which accrued or arose during that tax year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 159 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income,

• (a) at the Indian rate of tax or the rate of tax of the said country, whichever is the lower; or
• (b) at the Indian rate of tax, if both the rates are equal.

160(2)

If any non-resident person is assessed on his share in the income of a registered firm assessed as resident in India in any tax year and such share includes any income accruing or arising outside India during that tax year (and which is not deemed to accrue or arise in India) in a country with which there is no agreement under section 159 for the relief or avoidance of double taxation and he proves that he has paid income-tax by deduction or otherwise under the law in force in that country in respect of the income so included he shall be entitled to a deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income so included,––

• (a) at the Indian rate of tax or the rate of tax of the said country, whichever is the lower; or
• (b) at the Indian rate of tax, if both the rates are equal.

160(3)

In this section,—

• (a) “income-tax” in relation to any country includes any excess profits tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country;
• (b) “Indian income-tax” means income-tax charged as per this Act;
• (c) “Indian rate of tax” means the rate determined by dividing Indian income-tax after deduction of any relief due under the provisions of this Act but before deduction of any relief due under this section, by the total income; and
• (d) “rate of tax of the said country” means income-tax and super-tax actually paid in the said country as per the corresponding laws in force in the said country after deduction of all relief due, but before deduction of any relief due in the said country in respect of double taxation, divided by the whole amount of the income as assessed in the said country.

Explanation

Section Summary:

Section 160 of the new income tax law in India provides relief to taxpayers (both residents and non-residents) who have paid taxes on income earned outside India in countries with which India does not have a double taxation avoidance agreement (DTAA). The section allows such taxpayers to claim a deduction from their Indian income tax liability for the taxes paid in the foreign country, ensuring they are not taxed twice on the same income.

Key Changes:

1. Expanded Scope: The section now explicitly includes non-residents who are partners in Indian-registered firms and have income from foreign sources.
2. Clarification on Tax Rates: The deduction is calculated based on the lower of the Indian tax rate or the foreign tax rate, or the Indian tax rate if both rates are equal.
3. Inclusion of Additional Taxes: The definition of "income-tax" in the foreign country now includes excess profits tax or business profits tax, broadening the scope of taxes eligible for relief.

Practical Implications:

1. For Resident Taxpayers: Residents earning income abroad in non-DTAA countries can claim relief for taxes paid in those countries, reducing their overall tax burden in India.
2. For Non-Resident Partners in Indian Firms: Non-resident partners in Indian-registered firms can now claim relief for taxes paid on their share of foreign income, provided they meet the conditions.
3. Compliance Burden: Taxpayers must provide proof of taxes paid in the foreign country, which may involve additional documentation and verification.

Critical Concepts:

1. Double Taxation: This occurs when the same income is taxed in two countries. Section 160 provides relief to mitigate this issue.
2. Indian Rate of Tax: This is calculated by dividing the Indian income tax (after other reliefs but before Section 160 relief) by the total income.
3. Foreign Tax Rate: This is the actual tax paid in the foreign country (after local reliefs but before double taxation relief) divided by the total income assessed in that country.
4. Eligible Taxes: Includes income tax, excess profits tax, and business profits tax paid in the foreign country.

Compliance Steps:

1. Documentation: Taxpayers must maintain proof of taxes paid in the foreign country, such as tax payment receipts or assessment orders.
2. Calculation of Relief: Calculate the relief using the lower of the Indian tax rate or the foreign tax rate (or the Indian rate if both are equal).
3. Reporting: Include the details of foreign income, taxes paid, and the relief claimed in the Indian tax return.

Examples:

1. Resident Taxpayer Example:

   • Mr. A, a resident of India, earns ₹10 lakh from a business in Country X (no DTAA with India). He pays ₹2 lakh as tax in Country X.
   • Indian tax rate on his total income is 30%, and the foreign tax rate is 20%.
   • Relief is calculated at the lower rate (20%).
   • Deduction from Indian tax liability: ₹10 lakh × 20% = ₹2 lakh.
   • Mr. A’s Indian tax liability is reduced by ₹2 lakh.

2. Non-Resident Partner Example:

   • Ms. B, a non-resident, is a partner in an Indian-registered firm. Her share of income includes ₹5 lakh from Country Y (no DTAA with India). She pays ₹1 lakh as tax in Country Y.
   • Indian tax rate on her total income is 25%, and the foreign tax rate is 20%.
   • Relief is calculated at the lower rate (20%).
   • Deduction from Indian tax liability: ₹5 lakh × 20% = ₹1 lakh.
   • Ms. B’s Indian tax liability is reduced by ₹1 lakh.

This section ensures fairness in taxation for taxpayers with foreign income in non-DTAA countries, preventing double taxation and encouraging compliance.