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CMA Final · Direct Tax Laws and International Taxation · Double Taxation Avoidance Agreements (DTAA)

Mr. Arjun, a resident in India, earned foreign income of Rs 4,00,000 in a country that has no agreement with India under section 159. His Indian rate of tax is 30% and the rate of tax of that country, as defined in section 160, is 20%. He proves that he paid tax there. What deduction from his Indian income-tax is he entitled to on this income?

The deduction is Rs 80,000. Where no treaty exists, relief under section 160 is given at the lower of the Indian rate (30%) and the foreign rate (20%), applied to the doubly taxed income of Rs 4,00,000. Using the Indian rate would wrongly give Rs 1,20,000.

  1. ARs 1,20,000
  2. BRs 60,000
  3. CRs 80,000Correct
  4. DRs 40,000

Explanation

Under section 160(1), the deduction is calculated at the lower of the Indian rate and the foreign country's rate. The lower rate is 20%, so the deduction is 20% x Rs 4,00,000 = Rs 80,000. Rs 1,20,000 wrongly uses the higher Indian rate of 30%.

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