Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Direct Tax Laws & International Taxation

DTAA, Equalisation Levy, GAAR and BEPS for CA Final

Updated 5 October 2026

DTAA relief stops the same income being taxed twice, by treaty under section 90 or unilaterally under section 91. You claim foreign tax credit under Rule 128. GAAR (Chapter X-A) can deny a tax benefit from an arrangement whose main purpose is tax saving. BEPS is the OECD plan against profit shifting. To solve a question, find residence, pick the treaty or the Act, and apply the credit limit.

Understand DTAA, Equalisation Levy, GAAR and BEPS

Double taxation arises when two countries tax the same income. India taxes residents on global income and non-residents on India-sourced income. So a resident earning abroad can be taxed in both places. The law gives relief in two ways.

Section 90 lets the Central Government enter a DTAA (Double Taxation Avoidance Agreement) with another country. Under section 90(2), you can choose the Act or the treaty, whichever is more beneficial to you. A non-resident must hold a Tax Residency Certificate (TRC) to claim treaty benefit. The treaty allocates taxing rights, and relief comes by the exemption method or the credit method. Section 91 gives unilateral relief to a resident when there is no treaty with the other country.

Foreign tax credit (FTC) is how a resident actually claims credit for foreign tax paid. Rule 128 governs it. The credit is for tax on income that is also taxed in India. It cannot exceed the Indian tax on that income, and it is computed income-wise and country-wise. You file Form 67 with the evidence of foreign tax paid.

GAAR is in Chapter X-A of the Income-tax Act. It targets an impermissible avoidance arrangement (IAA): an arrangement whose main purpose is to obtain a tax benefit and which meets at least one of four tests. Under section 96(1), both conditions are required: the main purpose of obtaining a tax benefit, and at least one of the four tests. Meeting a test does not by itself create a presumption of main purpose. Under section 96(2), if a step in, or a part of, the arrangement is carried out otherwise than for bona fide purposes, the arrangement may be presumed to have been entered into for the main purpose of obtaining a tax benefit, unless the assessee proves otherwise. So the presumption is tied to a non-bona fide step or part, and the assessee can rebut it. Section 90(2A) lets GAAR apply even when a treaty is more beneficial. GAAR is a last-resort rule. It applies only if the aggregate tax benefit to all parties to the arrangement in the relevant assessment year exceeds ₹3 crore.

There is a procedural safeguard. The Assessing Officer first refers the matter to the Principal Commissioner or Commissioner. If that authority is satisfied that GAAR should be invoked, it refers the case to the Approving Panel. The Panel's directions are binding on the Assessing Officer.

Equalisation levy was India's tax on digital transactions with non-residents who had no permanent establishment (PE) in India. It was an indirect-style levy outside the Income-tax Act, and it responded to BEPS Action 1. The 6% levy on online advertisement services was removed from 1 April 2025. The 2% levy on e-commerce supply was removed from 1 August 2024. Read the latest ICAI material and amendments for what is examinable. BEPS (Base Erosion and Profit Shifting) is the OECD/G20 project of 15 Actions. India has applied it through the Multilateral Instrument (MLI), interest limitation, transfer pricing documentation and country-by-country reporting, and the significant economic presence rule.

Key rules to remember

Choice of Act or treaty: Section 90(2): assessee is governed by the Act or the DTAA, whichever is more beneficial; Applies where India has a treaty. For a non-resident, a TRC is needed to claim treaty benefit. Section 90(2A) says GAAR can still apply.
Section 91 relief (no treaty): Relief = Doubly taxed income × lower of (Indian average rate of tax, foreign average rate of tax); For a resident who paid tax in a country with which India has no agreement. Both rates are average rates, not marginal.
Foreign tax credit limit (Rule 128): FTC allowed = lower of (foreign tax paid on the income, Indian tax payable on that income); Computed income-wise and country-wise. Claim by Form 67 with the foreign tax evidence.
GAAR threshold: Aggregate tax benefit to all parties in the assessment year > ₹3 crore; Exceeds ₹3 crore, not 'equal to'. GAAR does not apply below this.
GAAR main-purpose test: IAA = arrangement whose main purpose is to obtain a tax benefit AND which meets at least one of: (a) non-arm's length rights or obligations, (b) misuse or abuse of the Act, (c) lack of commercial substance, (d) not carried out in a bona fide manner. Under section 96(2), if a step in, or a part of, the arrangement is carried out otherwise than for bona fide purposes, the arrangement may be presumed to have the main purpose of a tax benefit, unless the assessee proves otherwise.; Both the main-purpose condition and at least one test are required under section 96(1). Meeting a test does not raise a presumption of main purpose. The section 96(2) presumption arises only from a non-bona fide step or part of the arrangement, and it can be rebutted.
Interest limitation (BEPS Action 4): Section 94B: deductible interest = lower of (interest paid or accrued to the associated enterprise, 30% of EBITDA); Applies to interest above ₹1 crore paid to a non-resident associated enterprise, including interest on a loan guaranteed by an associated enterprise. Excess interest is carried forward for up to 8 assessment years.
BEPS 15 Actions (memory list): 1 Digital economy | 2 Hybrids | 3 CFC | 4 Interest | 5 Harmful practices | 6 Treaty abuse | 7 PE | 8-10 TP and value creation | 11 Data | 12 Disclosure | 13 TP documentation and CbCR | 14 Disputes | 15 MLI; Pair each Action with India's measure when answering.

How to solve DTAA, Equalisation Levy, GAAR and BEPS questions

Use this order for any question on treaty relief, FTC, GAAR, levy or BEPS. It keeps you from mixing rules.

1Read the facts and fix who the assessee is: resident or non-resident, and which country the income comes from.
2Check whether India has a DTAA with that country. If yes, think section 90 and the treaty. If no, think section 91.
3Under a treaty, compare the Act and the treaty and take the more beneficial one. For a non-resident, confirm the TRC and Form 10F are in place.
4For a resident claiming credit, compute the Indian tax on the doubly taxed income. Take the lower of foreign tax paid and that Indian tax, income-wise and country-wise.
5If the facts show a structure with a tax motive, test GAAR: the main purpose of obtaining a tax benefit (with the section 96(2) presumption where a step or part is not for bona fide purposes), at least one of the four tests, and the ₹3 crore threshold. Check grandfathering for investments made before 1 April 2017.
6If the facts mention digital services, cross-border interest, a shell company or documentation, link to the matching BEPS Action and India's measure.
7State the conclusion in provision, facts, conclusion form, with working figures shown separately.

Quickest way: Three-question filter

When to use it: Use it for 4 to 6 mark case-scenario MCQs and short parts of Paper 6 case studies.

Is the assessee resident? Resident means credit or relief (section 90, 91, Rule 128). Non-resident means treaty benefit with TRC.
Is there a treaty? No treaty means section 91 with the lower of the two average rates.
Is there a tax-driven structure? Then check the main purpose, at least one of the four GAAR tests and the ₹3 crore threshold before anything else.
For numbers, always take the lower figure: lower of foreign tax and Indian tax, or lower of the two average rates.

Common mistakes in DTAA, Equalisation Levy, GAAR and BEPS

Giving credit for the full foreign tax paid.
Students forget the limit and treat FTC as a refund of foreign tax.
Fix: Credit is capped at the Indian tax on that doubly taxed income. Excess foreign tax is not refunded or allowed in India.
Using marginal rates in section 91 relief.
The slab rate looks like the obvious rate to use.
Fix: Use the average rate of tax: Indian tax on total income divided by total income, and foreign tax divided by the foreign income.
Applying section 91 where a DTAA exists.
Sections 90 and 91 are learnt together and get mixed up.
Fix: Section 91 is only for countries with no agreement. If a treaty exists, work under section 90.
Saying GAAR applies to every tax-saving arrangement.
The words 'tax benefit' are read without the four tests and the threshold.
Fix: Check that the main purpose is a tax benefit and that at least one of the four tests is met. Then check the ₹3 crore threshold. Section 96(2) allows the main purpose to be presumed when a step or part of the arrangement is not for bona fide purposes, and the assessee can rebut it. Legitimate tax planning with commercial substance is outside GAAR.
Treating equalisation levy as part of income tax and as still in force.
Older notes describe the 6% and 2% levies as current.
Fix: Describe it as a levy outside the Income-tax Act, linked to BEPS Action 1. Say that the 6% levy ended on 1 April 2025 and the 2% levy on 1 August 2024, and check the latest amendments.
Listing BEPS Actions without India's implementation.
Students memorise the OECD list only.
Fix: For each Action you quote, add the Indian measure: MLI for Action 6 and 15, section 94B for Action 4, section 286 reporting for Action 13.

Worked examples

Example 1

Case: Mr Rao, a resident individual, has total income of ₹50,00,000, including ₹10,00,000 earned in Country X, with which India has no DTAA. He paid tax of ₹3,00,000 in Country X on that income. Assume, for this question, that the average rate of Indian tax on his total income, including cess, is 27%. Compute the relief available to him.

Show the solution

Treaty check: there is no DTAA with Country X, so section 91 (unilateral relief) applies. Mr Rao is a resident, so he qualifies.
Foreign average rate = ₹3,00,000 ÷ ₹10,00,000 = 30%.
Indian average rate = 27% (assumed in the question).
Relief is at the lower of the two rates, which is 27%.
Relief = 27% × ₹10,00,000 = ₹2,70,000.
The balance foreign tax of ₹30,000 (₹3,00,000 − ₹2,70,000) is not allowed as relief in India.

Answer: Mr Rao gets relief of ₹2,70,000 under section 91. The excess foreign tax of ₹30,000 is not relieved.

Example 2

Case: A foreign investor acquired shares in an Indian company in June 2019 through a newly set up intermediate company in a low-tax country. The intermediate company has no office, staff or business activity. It was added only to access a treaty rate. The tax benefit to the investor is ₹2.8 crore and to a related party ₹0.5 crore in the year. Can GAAR apply?

Show the solution

The company has no office, staff or activity, so the arrangement lacks commercial substance. That satisfies one of the four tests.
GAAR needs both a main purpose of obtaining a tax benefit and at least one test. The main purpose is shown by the facts: the company was added only to access a treaty rate. Lack of commercial substance satisfies the test. Both conditions of section 96(1) are met.
Threshold: aggregate tax benefit to all parties = ₹2.8 crore + ₹0.5 crore = ₹3.3 crore. This exceeds ₹3 crore, so GAAR can be invoked.
Grandfathering: the investment was made in June 2019, which is after 1 April 2017. So the exclusion for investments made before that date does not help.
Procedure: the Assessing Officer refers the matter to the Principal Commissioner or Commissioner. If that authority is satisfied that GAAR should be invoked, it refers the case to the Approving Panel, whose directions bind the Assessing Officer.
Section 90(2A) applies, so the treaty being more beneficial does not prevent GAAR.

Answer: Yes. The main purpose is a tax benefit, the arrangement lacks commercial substance, the aggregate tax benefit of ₹3.3 crore exceeds ₹3 crore, and the June 2019 investment is not grandfathered. The Approving Panel route must be followed. The tax benefit, including the treaty rate, can be denied.

Exam tips

In Paper 6, expect a short fact pattern with several taxes. Say which provision applies first, then work the numbers. Marks follow the sequence.
Always show the 'lower of' comparison line in FTC and section 91 working. A missing comparison is the commonest mark loss.
For GAAR, write the main-purpose condition, the four tests (at least one must be met), the section 96(2) presumption for a step or part not carried out for bona fide purposes, the ₹3 crore limit and the referral route to the Approving Panel in that order.
For equalisation levy, state the current position carefully and note it was a response to BEPS Action 1. Do not quote old rates as in force.
In BEPS answers, pair each Action with an Indian measure. A two-column mental list is enough.

Practice questions from Direct Tax Laws & International Taxation

DTAA, Equalisation Levy, GAAR and BEPS: frequently asked questions

What is the difference between section 90 and section 91?

Section 90 covers relief under a DTAA that India has signed, for residents and non-residents as the treaty provides. Section 91 gives unilateral relief to a resident when there is no treaty with the country where the tax was paid. Under section 91 the relief is at the lower of the Indian and foreign average rates.

How do I claim foreign tax credit in India?

You compute the credit under Rule 128, income-wise and country-wise, and it cannot exceed the Indian tax on that income. You file Form 67 with proof of foreign tax paid, within the time the rule allows. Check the current rule text for the filing deadline.

When does GAAR apply?

GAAR applies to an arrangement whose main purpose is to obtain a tax benefit and which also meets at least one of four tests, such as lack of commercial substance. Under section 96(2), if a step in, or part of, the arrangement is not carried out for bona fide purposes, the arrangement may be presumed to have that main purpose unless the assessee proves otherwise. The aggregate tax benefit must exceed ₹3 crore, and investments made before 1 April 2017 are grandfathered.

Is equalisation levy still relevant for CA Final?

Yes, for understanding and for case discussion. The 2% e-commerce levy was withdrawn from 1 August 2024 and the 6% levy on online advertisement from 1 April 2025. Learn why it existed and how it links to BEPS Action 1, and follow the latest ICAI amendments.

How do I remember the BEPS Action Plan?

Group the 15 Actions: digital economy (1), mismatches (2, 3, 4, 5), treaty and PE (6, 7), transfer pricing (8 to 10, 13), and process (11, 12, 14, 15). Then link each group to an Indian rule such as MLI, section 94B or country-by-country reporting.