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CA Final · Direct Tax Laws & International Taxation · Overview of Model Tax Conventions

Under the OECD Model, Article 23A (exemption method) and Article 23B (credit method) deal with elimination of double taxation. Sunita, resident of India, earns 10,00,000 from State Z, which taxes it at 20% (2,00,000). Indian tax on her total income, including this income, is 30%, and the treaty uses the ordinary credit method under Article 23B. What is the maximum credit allowed in India for this income?

The maximum credit is 2,00,000. Under the ordinary credit method in Article 23B, credit is limited to the lower of foreign tax paid, 2,00,000, and Indian tax attributable to that income, 3,00,000. India therefore taxes the balance of 1,00,000.

  1. A2,00,000Correct
  2. B3,00,000
  3. C1,00,000
  4. DNil

Explanation

Under the ordinary credit method, credit is the lower of foreign tax paid and the resident-state tax attributable to that income. Foreign tax is 2,00,000. Indian tax attributable is 30% of 10,00,000 = 3,00,000. The lower figure is 2,00,000, so that is the credit; India collects the remaining 1,00,000. Allowing 3,00,000 would ignore the limit.

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