Double taxation refers to income taxes that are levied twice on the same source of earned income. This imposition of taxes two or more times has two different aspects.
The two different aspects are
The classical system of taxation is the type of taxation in which the organization is taxed twice by the government on paying dividend to the shareholders on the corporate income.
The other, taxation by two or more countries of the same income earned by an individual; like income paid by a unit of one country to a resident of a different country. This double liability is often mitigated by tax treaties between the countries.
In the case of business done internationally it often happens that the individual resident in one country makes a taxable gain to another country. This person pays a tax on that gain locally and also pays it again to the country in which the gain was made. Since this is inequitable countries often make bilateral double taxation agreements with each other. In this the tax should be paid in the country of residence and can be exempt in the country where the income arises. In other case, the government of the country where the gain is made deducts the tax at source and the tax payer receives a foreign tax credit in the country of residence which reflects that the tax has been paid. This deduction of tax at source is called as “withholding tax”. But for obtaining this credit the tax payer has to file that he is non-resident of the foreign country. The taxation authorities exchange information about all these declarations and find out the anomalies that indicate tax evasions.
India has signed a double taxation treaty with 79 countries. Under in Income tax act of India, there are two provisions – section 90, section 91 which provides specific tax relief to tax payers.
Section 90 is for those who paid tax to country with which India signed DTAA (Double taxation avoidance agreement).
Section 91 for those tax payers who paid tax to the country with which India did not sign the DTAA.
In the case India, a large number of foreign investors operate from Mauritius. As per the tax agreement between India and Mauritius, a capital gain getting from the sale of shares is taxable in the country where the investor resides but not the country where the company is situated. That means a company in Mauritius selling shares of an India company need not pay tax in India. Since in Mauritius there is no capital gains tax the tax is exempted all together.
Dividends are nothing but the profits earned by a company distributed to its shareholders or otherwise called as part owners.
A dividend tax is a type of income tax levied on the shareholders of a company.
Most governments worldwide consider dividend income as any other source of income earned by an individual if he were working in a firm. So these dividend incomes are taxed as the normal income taxes which are usually levied on a person earning his income by working in a company.
Opponents of dividend income taxes argue this is nothing but “double taxation”, since the profits along with income earned by a company is already taxed at the source and what the shareholders get is the taxed part.
In the case of India, earlier all the dividends earned by a company were liable to taxation called as dividend distribution tax. This results in a smaller dividend to the recipients or the shareholders. The tax rate alternated 10% to 20%. But it was removed on March 2002.
For big companies double taxation affects the most since their earnings are taxed twice at corporate and personal levels. It means the corporation must pay a tax at the corporate rate before any profits are distributed to the shareholders. And after the distribution of the profits as dividends to the shareholders, are taxed again at the individual rate.
But the double taxation does not affect the small companies since their profits are distributed to the employees as wages.
Dividends paid by a domestic company are subjected to a tax rate of 16.995%. Dividend distribution tax is exempt in the hands of the recipient. Dividends from a foreign company are subjected to corporation tax but a credit for withholding tax is available for the paid foreign taxes.
A capital gain is income from an investment which can be a house, stocks, or building. This is of two types.
Short term capital gains are those which are held for less than 1 year in case if stocks and less than 3 years in case of house or buildings.
Long term capital gains are the contrary of short term capital gains. In that, if an asset is held for more than 36 months or, a mutual fund or share held for more than 1 year are called as long term capital gains. The tax paid on the capital gains is projected in the table given below
|Short Term Capital Gains Tax||Long Term Capital Gains Tax|
|Sale on transaction of securities which attract STT||10%||Nil|
|Sale on transaction of securities which do not attract STT|
|Individuals(resident and non-resident)||Progressive slab rates||20% with indexation
10% without indexation( for units/zero coupled bonds)
|Partnerships(resident and non-resident)||30%||-do-|
|Overseas financial organisations specified in section 115AB||40%(corporate)
|Other foreign companies||40%||20% with indexation
10% without indexation for units/zero coupon bonds
|Co-operative society||Progressive slab rates||-do-|
Now-a-days ordinary income taxes are substituted by “environmentally motivated” taxes or “green” taxes.
But the exact meaning of environmental taxes is, it is type of taxation whose tax base has a profound negative impact on the environment.
Or it is nothing but a tax paid by the individuals who tend to spoil the greenery or the environment.
Petrol tax, vehicle excise duty, landfill tax, carbon tax introduced recently. Very recently Irish government introduced a tax on plastic bags.
The main aim of these environmental taxes is to reduce the usage of those products which are harmful for the environment.
There are four types of environmental taxes. They are:
These taxes not only create revenue for the government but also reduce the harmful effects which the nature unfriendly products create to the environment. Because, when environmental taxes are paid people either generally tend to stop using the products or they try to recycle the product for another purpose.
This is a double dividend which is bought by levying tax on environmental unfriendly products or works.
This is a type of tax on consumption of goods or services. This is a type of indirect tax. This is generally regressive in nature; because, it depends upon the consumption of any good. The sales tax is considered to be consumption tax. A consumption tax is a tax on spending rather than on the income.
Income = Consumption + Savings.
Therefore Consumption = Income – Savings.
VAT or sales tax is generally considered to be a consumption tax because the tax burden is ultimately borne by the consumer of the goods or services.