Foreign tax credit is available to Indian residents in respect of tax paid on foreign income which is included in their taxable income in India.
Indian residents are increasingly diversifying their income sources not only from India but also from foreign jurisdictions. This poses a unique challenge since the same income may be taxed in the foreign country where it arises and also in India, since resident Indians have to pay tax on their global income.
In order to avoid double taxation, India allows, through its local tax law as well as under the tax treaties (DTAA), credit of taxes paid abroad. This is done by allowing a reduction from the Indian tax liability the taxes which are paid in another country. For many years, computation of the eligible credit was fraught with interpretation differences. Central Board of Direct Taxes prescribed formal rules for computation of such foreign tax credit in 2016 know as Foreign Tax Credit (FTC) Rules.
Foreign Tax Credit Rules
FTC is available to Indian residents in respect of tax paid on foreign income which is also included in their taxable income in India. In case the income is taxable in more than one year, credit is distributed on a pro-rata basis over such years. FTC is available against tax, surcharge and cess but not against any fee, interest or penalty. The credit is available only for taxes payable in India on the foreign income. Excess tax paid abroad is ignored.
FTC is not available for a disputed foreign tax liability. Credit is only available after the dispute is settled. To avail such credit, the taxpayer is required to submit (a) evidence of settlement of dispute; and (b) evidence of discharge of tax liability within six months from the date of settlement of dispute.
Documentation & E-Filing
Resident taxpayers need to file prescribed details of the foreign income and taxes paid in Form 67. The form is to be filed electronically. It needs to be accompanied by a certificate mentioning the nature of income and taxes paid thereon. The certificate must be obtained from (a) the foreign tax authority; or (b) the person responsible for withholding tax. A self-declaration is permitted provided that it is supplemented by an acknowledgment of payment of foreign tax or by a proof of tax withholding at source.
FTC rules require filing of Form 67 before the due date of filing a tax return. One may face problems when the information or documentation concerning foreign income or taxes is available only after the due date of filing the return has passed. This may happen when the foreign jurisdiction adopts a taxable period different from the Indian “previous year”. Again, since Form 67 needs to be filed on or before the due date of filing the tax return, this may create hurdle for taxpayers who may not be in a position to file Form 67 by due date of filing tax return and/or who needs to revise tax return at a later stage. The only course of action for the taxpayer would be to submit the ‘Form’ in paper format before the Assessing Officer. Even so, since the procedure is straitjacketed, paper filing is unlikely to be accepted at the initial level and litigation cannot be ruled out.
Taxpayers would be advised to file Form 67 for AY 2018-19 (FY 2017-18) on or before due date of filing tax return to ensure that FTC claim is not denied by the authorities on mere procedural/ filing reasons. Due care should be taken to ensure that FTC claim is correctly reported and does not involve a correction at a later date.
The writer is partner, Nangia Advisors LLP. Inputs from Mansi Chopra