India: How to claim a foreign tax credit?
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With increased scope of globalization and increasing levels of economic activity, entrepreneurs, to explore the potentials of the global market, are expanding their business activities in various countries. This has led to an increase in cross-border transactions which, in turn, raises many issues of double taxation of their income.
Each Company / Individual is taxed on its overall 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 the source of that income is from another country. This is an obstacle to the fluidity of cross-border transactions. Many countries have therefore signed Double Tax Avoidance Agreements (DTAA) as a solution to address this double taxation problem.
The fundamental purpose of the DTAA is to distribute the right to tax between the country of residence and the country of source. Usually, the country of residence allows credit for taxes paid in the source country.
India has established rules (Rule 128) that regulate and define how this foreign tax credit will be available to these residents while they are claiming a credit for taxes paid in the country of the source of their income.
On the basis of the adopted rules and regulations, here is an attempt to clarify some questions that arise in obtaining the credit of the foreign tax paid.
- What is the Foreign Tax Credit (FTC)?
- The FTC is a tax paid in a foreign country on income earned in a foreign country by an assessed person. It can also be withheld at source abroad by a non-resident on the source of income generated by a resident abroad. Such amount of tax paid / deducted in a foreign company can be deducted from the tax payable in the country of residence.
- In what year is the credit available?
- The FTC credit is available in the year the income corresponding to that tax was proposed for tax in India.
- In case the income corresponding to this tax is proposed for tax in India over several years, the FTC must be claimed in those years in the same proportion in which the income is proposed for tax.
- Against what liability credit can we claim?
- The FTC can be claimed against the amount of income tax, surtax, and income tax liability. However, it cannot be claimed against any liability for interest, fees or penalties payable under the Income Tax Act.
- If the foreign tax is disputed in any way, it cannot be claimed against tax liability in India. However, once the dispute is settled, the credit for this tax can be claimed in the year in which the income is offered for tax in India upon presentation of proof of dispute settlement, proof of payment the disputed tax and the required commitment.
- What is the mechanism for calculating the amount of FTC available?
- The TCF is calculated for each source of income from each country.
- The qualifying credit is less than the tax payable under the Income Tax Act on that income and the actual foreign tax paid on that income.
- In the event that the foreign tax paid exceeds the amount of tax payable under the Double Taxation Avoidance Agreement, this excess will be disregarded.
- What documents are needed to claim the FTC?
- A statement of calculation of the income of that country outside of India and of the foreign tax deducted or paid on such income in Form No. 67;
- A certificate or declaration specifying the nature of the income and the method of taxation thereof or paid by the assessor of –
- The tax administration of that country or
- The person responsible for the deduction of this tax or
- The evaluated. In this case, the appraisee must also provide
- Acknowledgment of receipt of the tax online or at the bank or challan counter for the payment of the tax when the payment has been made by the assessed:
- Proof of tax deduction when tax has been deducted.
- Can FTC be claimed if tax is payable under the Alternative Minimum Tax (MAT)?
- Yes, the FTC will be deducted from tax payable under the MAT in the same way it qualifies under the normal provisions of the Income Tax Act.
- However, when the FTC available against tax payable under the MAT exceeds the tax credit available under the normal provisions of the Act, the excess should be disregarded.
- What is the deadline for submitting the FTC application?
- The declaration in Form No. 67 and a certificate or declaration as mentioned above must be provided no later than the due date specified for the income tax return under Article 139 (1) of the Income Tax Act. This form must be filed online.
- What conversion rate to adopt?
- For the purpose of converting foreign currency into Indian rupee, the wire transfer purchase rate of the last day of the previous month in which the tax was paid or deducted will be adopted.
- The wire transfer purchase rate is the rate adopted by the State Bank of India to purchase such currency.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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