The era of globalization and digitalization has brought a revolution in the way businesses are conducted, bringing the economies/geographies closer. While the businesses are evolving, the tax challenges relating to the right to tax the income between the Source and Residence Country are equally evolving.
Tax Treaties play a very crucial role to ensure that the taxes on income are distributed between the sovereigns while eliminating/ minimizing double taxation in the hands of the person earning the income. In this article, we are giving an overview of the regulations relating to the claim of Foreign Tax Credit (FTC) in India and the related tax issues.
Foreign Tax Credit
FTC is allowed to be a resident of India in respect of the tax paid by him in a source country or specified territory outside India either by deduction or otherwise.
FTC is allowed in the year in which the corresponding income has been offered to tax in India. Where the income is offered to tax in multiple years, FTC is allowed on a proportionate basis corresponding to the income offered in relevant years.
The key provisions relating to FTC in the Income-Tax Act, 1961 (ITA) read with the rules thereunder1 are as follows:
- FTC is allowed in respect of tax paid outside India irrespective of whether India has entered into a Double Taxation Avoidance Agreement (DTA) with such country or specified territories or not. Where DTA is entered, the FTC is allowed for the taxes covered under the DTA. The provision of the DTA has an overriding effect over the provisions in ITA to the extent they are more beneficial. In case of no DTA, the FTC claim may be considered as per the provisions of section 91 of the ITA.
- FTC is restricted to the amount of tax payable in India on the corresponding income. Excess foreign tax paid over the taxes payable in India will not be allowed as credit. FTC can be claimed only against the tax, surcharge, and cesspayable on the corresponding income in India. As such, it cannot be claimed against any interest or penalty payable under the provisions of the ITA.
- FTC is allowed where the taxes are payable in India on the corresponding income under the normal provisions of ITA as well as where Minimum Alternate Tax (MAT) is payable. Where the FTC is claimed against MAT, the excess of FTC over the FTC allowable against tax payable under the normal provisions of ITA will be ignored while computing the MAT credit carried forward.
- For claiming the FTC, the taxpayer is required to file the prescribed form -Form 67 by the end of the relevant assessment year in which the corresponding income is offered to tax and where the return of income has been furnished within the due date of filing an original tax return or belated tax return. The form is required to be filed online and needs to be accompanied by the relevant proofs substantiating the payment of taxes in a foreign country.
Over the years, there have been various issues relating to the eligibility to claim FTC, the amount that can be claimed as a credit, relating to filing of Form 67, which we have covered in the ensuing paragraphs.
Footnote
1. Section 90, 91 of the Income tax Act, 1961(ITA) read with Rule 128 of the Income tax Rules 1962.
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.
