The Central Board of Direct Taxes’ (CBDT) draft norms that allow Indian taxpayers to claim foreign tax credit (FTC) against their domestic tax, cess and surcharge liabilities has attempted to streamline procedures to eliminate possibility of double-taxation. Taxpayers will now be able to claim credit for taxes paid overseas in foreign jurisdictions against Indian tax liability on the same income.
However, tax experts feel that the norms can be streamlined further to ease the compliance burden on taxpyers.
“The draft rules streamline a number of issues providing much needed certainty in the determination of FTC,” says Rahul Jain, Partner, Nangia and Co. However, he feels that taxpayers should have been allowed to pool worldwide tax credit. “The Draft FTC rules contemplates a source-by-source and a country-by-country basis for computing the FTC to be granted to a taxpayer.
Essentially, this means that each individual source of income from a particular country is to be considered on a stand-alone basis for the purpose of grant of FTC. This system is inherently complex and results in less than optimal eligibility of FTC. It would have been better if the taxpayers were allowed to pool worldwide tax credits for claiming FTC in India – the same would have been less complex while offering a substantially more efficient FTC system.
Sanjay Sanghvi, Tax Partner, Khaitan & Co said the Indian income-tax authories could specify that withholding tax certificate may be issued by the payor in the foreign country concerned and not necessarily by that country’s tax authorities. “That could make it simpler for the Indian taxpayers to avail FTC,” Sanghvi said.
Nidhi Goyal, Managing Director, Tax & Regulatory Affairs, Protiviti India, feels clarity is required in areas such as carry forward of tax credit and tax refunds. “The proposed FTC rules gives fair guidance to the residents in India for claiming credit of tax. These rules is also expected to give certainty for the claim made in the tax return and should reduce litigation. However, there is still certain areas left unclarified, like carry forward of tax credits, underlying credits in certain foreign jurisdiction and tax refunds as it is allowed in other countries,” she said.
In the draft FTC rules, the CBDT proposed that Indian taxpayers could also offset taxes paid overseas against their domestic minimum alternate tax (MAT) liability. “The rules address a hotly-litigated issue by mandating that FTC will be allowed against levy of MAT for corporate taxpayers,” Nangia said.
He said the Rules he draft rules streamline a number of issues providing certainty in the determination of FTC. “The rules were necessary since in the absence of a clear mechanism, determining the FTC is prone to differing interpretations between taxpayers and the administration, resulting in disputes and litigation.,” Nangia said.
Sanghvi agreed. “This is a positive move. It will streamline and simplify things,” he said.