Taxation of Personal Services, Other Income and Relief under Tax Treaties

Understand Taxation of Personal Services, Other Income and Relief

Key rules to remember

Article 15 short-stay exemption (all three conditions)

Source state cannot tax salary if: (a) stay ≤ 183 days in the specified period AND (b) employer is not a resident of the source state AND (c) cost is not borne by a PE/fixed base in the source state

All three must be satisfied together. On the model wording, a stay of exactly 183 days still qualifies. Check whether the treaty counts days in the fiscal year, the tax year or any 12-month period, and follow the treaty given in the question.

Article 14 independent services (UN-style)

Source state may tax only if fixed base regularly available OR stay amounts to or exceeds 183 days (UN Model wording); tax only on income attributable to that base or the services there

Treaty wording varies. Some treaties say 'exceeding 183 days', some use a different day limit, and some use a 'furnishing of services' test. Do not treat the boundary as universal. Follow the treaty given in the question.

Artistes and sportspersons (Article 17)

Taxable in the state where the performance takes place

Applies overriding the business profits and personal services articles. Some treaties exempt cultural exchange or state-funded visits.

Students (Article 20)

Payments from sources outside the host state for maintenance, education or training are not taxed in the host state

Applies to a person who was a resident of the other state just before the visit and is present only for education or training.

Other income (Article 21)

Residence state taxes; source state may also tax under UN-style treaties

Use only if no other article covers the income. Income effectively connected with a PE goes to the business profits article.

Exemption method

Foreign income is excluded from residence-state tax; full exemption excludes it entirely, exemption with progression uses it only to decide the rate

Rare in India's treaties. Read the treaty to see which version applies.

Ordinary credit method (limit)

Credit = lower of (a) foreign tax paid and (b) residence-state tax on that foreign income

Compute (b) at the average rate of tax on total income applied to the doubly taxed income. Credit is computed income by income and country by country, and is limited to the Indian tax on that income. Under Indian domestic rules, excess foreign tax is generally not refunded or carried forward. Follow the treaty or rule given in the question.

Unilateral relief (no Section 90 agreement)

Credit = lower of Indian tax rate and foreign tax rate × doubly taxed income

Conditions: resident of India, foreign tax paid on income that accrued or arose outside India and is also taxed in India, and no agreement under Section 90 applies to that country.

Net tax after credit

Net residence-state tax = Tax on total income − Credit allowed

Credit cannot exceed the Indian tax on that foreign income, and the foreign tax must actually be paid on income that is also taxable in India.

How to solve Taxation of Personal Services, Other Income and Relief questions

1. 1Identify the two countries and the taxpayer's residence for treaty purposes. If the person is resident in both, apply the tie-breaker first.
2. 2Classify the income: employment, independent services, artiste or sportsperson, student receipt, or other income. Note if it is connected to a PE.
3. 3Pick the article. For employment, test the three short-stay conditions one by one and write the result of each. For independent services, read the day test in the treaty given.
4. 4Decide which state may tax and whether the treaty gives one state exclusive rights or shared rights.
5. 5If both states can tax, check which relief method the treaty prescribes: exemption or credit. If no Section 90 agreement applies, check the unilateral relief conditions: resident of India, foreign tax paid on income that accrued or arose outside India and is taxed in India.
6. 6For credit, compute foreign tax paid, then Indian tax on the same income at the average rate, and allow the lower figure. Do it income by income and country by country. Follow the treaty or rule given in the question on any excess foreign tax.
7. 7Compute net tax and state the conclusion in one sentence, mentioning that the treaty applies only if it is more beneficial than domestic law.
8. 8Mention the documents needed to claim relief, such as a tax residency certificate and proof of foreign tax paid.

Quickest way: Three-condition check, then lower-of rule

Common mistakes in Taxation of Personal Services, Other Income and Relief

• Applying only the 183-day test and ignoring the other two conditions of Article 15.

  The day count is the memorable part and appears in the question, so students stop after it.

  Fix: Write the three conditions as a checklist in every answer. A short stay with an employer resident in the source state, or a PE bearing the cost, still lets the source state tax.

• Using the same 183-day boundary for Article 14 and Article 15 without reading the treaty.

  Both articles mention 183 days, so students treat the wording as identical.

  Fix: On the UN Model wording, Article 14 taxes at the source on a stay amounting to or exceeding 183 days, and Article 15 exempts a stay not exceeding 183 days. So exactly 183 days is taxable under Article 14 and exempt under Article 15 (if the other conditions are met). Treaty wording varies, so apply the wording of the treaty given in the question.

• Using the 183-day rule for artistes and sportspersons.

  Students treat all personal services alike.

  Fix: Remember that Article 17 overrides the other personal-service articles. The state of performance taxes the income regardless of days or fixed base.

• Allowing the full foreign tax as credit.

  Students assume credit means a rupee-for-rupee set-off.

  Fix: Credit is the lower of foreign tax paid and Indian tax attributable to that foreign income. Under Indian domestic rules, excess foreign tax is generally not refunded or carried forward. Follow the treaty or rule given in the question.

• Confusing the exemption method with the credit method.

  Both remove double taxation and the terms sound similar.

  Fix: Under exemption the income leaves the tax base. Under credit the income stays in the base and the foreign tax is deducted from the resulting tax.

• Treating treaty and domestic law as alternatives with no comparison, or claiming unilateral relief without its conditions.

  Students pick one source and apply it mechanically.

  Fix: State that the assessee may choose the provision more beneficial to them. Claim unilateral relief only if you are a resident of India, you have paid foreign tax on income that accrued or arose outside India and is taxed in India, and no agreement under Section 90 applies. Then the credit is the lower of the Indian and foreign tax rates on the doubly taxed income.

• Using Article 21 when the income is already covered by another article or is linked to a PE.

  'Other income' sounds like a safe default.

  Fix: Treat Article 21 as a last resort. First test if the income fits dividends, interest, royalties, fees for technical services, business profits or employment.

Worked examples