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CS Professional · Goods and Services Tax (GST) and Corporate Tax Planning · Corporate Tax Planning

Section 159 of the Income-tax Act, 2025 permits an agreement with another country for avoiding double taxation. What condition does the section attach to such avoidance of double taxation?

Avoidance of double taxation must be achieved without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including treaty-shopping arrangements. Section 159(3)(b) states this condition, so treaty benefits cannot be used to obtain indirect benefits for residents of third countries.

  1. AIt must create opportunities for reduced taxation in the other country to encourage investment
  2. BIt must be without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including treaty-shoppingCorrect
  3. CIt must apply only to income on which tax has not been paid in either country
  4. DIt must be limited to exchange of information and exclude recovery of tax

Explanation

Section 159(3)(b) provides for avoidance of double taxation without creating opportunities for non-taxation or reduced taxation through evasion or avoidance, including treaty-shopping. Option 3 is wrong because relief covers income on which tax has been paid in both countries, and option 4 is wrong because recovery of tax is also a permitted purpose.

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