India: How To Claim Foreign Tax Credit?

Last Updated: 10 October 2018
Article by Malay Damania

With increased scale of globalisation and growing levels of economic activities, the entrepreneurs, to explore global market potentials, are expanding their business activities in various countries. This has led to increased cross border transactions which in turn raises many issues on double taxation of their income.

Every Company/Individual is taxed on its global income in the country of its residence. A Company/Individual is also exposed to tax in the country where it has its Source of income. Therefore, they are exposed to double taxation on the same income, if source of such income is derived from another country. This is hindrance to smooth flow of cross border transactions. Many countries have therefore signed Double Tax Avoidance Agreements (DTAA) as a solution to address this problem of double taxation.

The basic aim of the DTAAs is to allocate taxation right between the country of residence and country of source. Generally, the country of resident allows credit of the taxes paid in country of source. 

India has framed rules (Rule 128) that regulates and defines the manner in which such foreign tax credit shall be available to such residents while they claim credit for the taxes paid in country of source of their income.

Based on the rules and regulations made, following is an attempt to clarify a few questions that arises on getting credit of the Foreign Tax paid.

  • What is Foreign Tax Credit (FTC)?

    • FTC is tax paid in foreign country on income derived in foreign country by an assessee. It can also be tax deducted at source in the foreign country by a non-resident on the source of income generated by a resident in foreign country. Such amount of tax which is paid/deducted in foreign company can be claimed as credit against the tax liability in the country of resident.
  • In which year the credit is available?

    • The credit of FTC is available in the year in which the income corresponding to such tax has been offered to tax in India.
    • In case the income corresponding to such tax is offered to tax in India in multiple years, the FTC shall be claimed across those years in the same proportion in which the income is offered to tax.
  • Against which liability credit can be claimed?

    • The FTC can be claimed against amount of Income Tax, surcharge and cess liability. It, however, cannot be claimed against any liability on account of interest, fee or penalty payable under the Income Tax Act.
    • If foreign tax is disputed in any manner, the same cannot be claimed against tax liability in India. However, once the dispute is settled, the credit for such tax can be claimed in the year in which income is offered for tax in India on furnishing of evidence of settlement of dispute, proof of payment of such disputed tax and requisite undertaking.
  • What is the mechanism to compute the amount of FTC available?

    • The FTC shall be computed for each source of income arising from each country.
    • The credit allowable shall be lower of tax payable under the Income Tax Act on such income and actual foreign tax paid on such income.
    • In case where the foreign tax paid exceeds the amount of tax payable according to the Double Tax Avoidance Agreement, such excess shall be ignored.
  • What documents are required to claim FTC?

    • A Statement of computation of Income of that country outside India and foreign tax deducted or paid on such income in Form No. 67;
    • A certificate or statement specifying the Nature of Income and the manner of tax deducted therefrom or paid by the assessee from –

      1. The tax authority of that country or
      2. The person responsible for deduction of such tax or
      3. The assessee. In such case, the assessee also need to provide
    • Acknowledgement of online payment of tax or bank counter foil or challan for payment of tax where the payment has been made by the assessee:
    • Proof of deduction of tax where the tax has been deducted.
  • Whether the FTC can be claimed if tax is payable under Minimum Alternative Tax (MAT)?

    • Yes, FTC shall be allowed against tax payable under MAT in the same manner as it is allowable under normal provisions of the Income Tax Act.
    • However, where the FTC available against tax payable under MAT exceeds the tax credit available under normal provisions of the Act, the excess shall be ignored.
  • What is the timeline to submit the claim of FTC?

    • The statement in Form No. 67 and a certificate or statement as referred above shall be furnished on or before the due date specified for furnishing return of income under section 139(1) of The Income Tax Act. This form needs to be filed online.
  • What conversion rate should be adopted?

    • For the purpose of converting foreign currency into Indian rupee, Telegraphic Transfer Buying Rate on the last day of the previous month in which the tax has been paid or deducted shall be adopted.
    • Telegraphic Transfer Buying rate is the rate adopted by the State Bank of India for buying such currency.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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