My VIP Tax Team question of the week: Tax Sparing Relief
My client is a UK-resident under the SRT but a NRI in India, (non-resident Indian) he is in receipt of interest from a savings bank account in India called a NRE (non-resident external account), this interest is not subject to tax in India due to special form of relief. However, he has been told by a relative that he can still receive tax credit in the UK despite no tax being paid to the Indian tax authorities, can you confirm if this is the case?

In short, yes, the client can still claim the relief despite not being taxed twice.

Normally, a UK resident is subject to tax in the UK on foreign interest arising to them as per s.369 ITTOIA05 and under the Double Taxation Agreement between UK and India article 12 states interest may be taxed in the other contracting state i.e the UK. This would allow the individual to claim double tax relief and receive credit in the UK for the foreign tax suffered. A core principle of double tax relief is the that the person in question must have suffered tax in both contracting states, which your client has not.

However, there does appear to be an exception regarding your client’s circumstances, this is due to a concept called tax spared. Tax sparing is a tax treaty provision under s.20 of TIOPA 2010 whereby a contract state agrees to grant relief from residence taxation with respect to source taxes that have not actually been paid, i.e taxes that have been spared. The country’s domestic legislation giving the relief must be specified in the double taxation agreement article.

The double taxation agreement between the UK and India provides for this in article 24, paragraph’s 3&4:

24(3) Subject to paragraph (5) of this Article, for the purposes of paragraph (1) of this Article the term “Indian tax payable” shall be deemed to include:

(a)any amount which would have been payable as Indian tax but for a deduction allowed in computing the taxable income or an exemption or reduction of tax granted for that year in question under the provisions of the Income-tax Act 1961 (43 of 1961) referred to in paragraph (4)(a) or (b) of this Article;

24(4) The provisions referred to in this paragraph are:

(a)sections 10(4), 10(4B), 10(6)(viia), 10(15)(iv), 33AB, 80HHD, 80I and 80IA;

(b)any other provision which may subsequently be enacted granting an exemption or reduction from tax which is agreed by the competent authorities of the Contracting States to be of a substantially similar character to a provision referred to in sub-paragraph (a) of this paragraph, if it has not been modified thereafter or has been modified only in minor respects so as not to affect its general character;

(c)sections 10A and 10B.

This is subject to article 5, which states that relief shall not be given if the income relates to a period starting more than 10 fiscal years after the deduction in computing taxable income or exemption from, or reduction of, Indian tax. Therefore, the client will need to check when the account in which the interest arose was first opened. If later than 10 years, the tax sparing legislation will not apply, and no credit will be due.

Despite being exempted under the Indian authorities rules it is still subject to the cap of 15% within Article 12(2), meaning your client’s double tax relief cannot exceed 15% of the gross amount of the interest when computing the relief. Of course, s.33 of TIOPA 2010 will need to be considered under normal principles.

HMRC have confirmed their position on tax sparing at INTM161270 and in relation to the UK-India DTA at DT9553.

So, to summarise, the client still claims double tax relief despite the income not being subject to tax in India under their special relief provisions, the relief itself is still subject to the cap within article 12 of the UK India DTA and the normal rules contained in TIOPA 2010.

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Apprentice Tax Advisor
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Stuart started working for CTW in 2016 as a tax administrator on the overflow lines. He then moved into Finance in May 17 where he completed his AAT L2. He is now a member of the Tax team, currently studying for his ATT qualification and working towards being a valued member of the team.

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