Income tax return filing 2018: Claiming foreign tax credit – how to deal with practical challenges

Updated: August 28, 2018 12:39 PM

If you have worked abroad for a year or have some overseas investments such as bank accounts, shares, 401K, pension or real estate etc then in addition to disclosing these assets in India, you are also required to report the income you would have earned from these foreign investments.

income tax refund, How to Claim Tax Refund, how to claim income tax refund, income tax return filing, income tax efiling, Check refund statusThe Indian tax return for the tax year 2017-18 can be revised until March 31, 2019

By Kuldip Kumar, Partner and Leader – Personal Tax – PwC India

You are just almost at the fag end of the tax filing season and in case you are yet to file the return, August 31, 2018 is the extended filing deadline. If you qualify to be an ordinary resident of India, you are liable to tax in India on your global income. If you have worked abroad during the year or have some overseas investments such as bank accounts, shares, 401K, pension or real estate etc, you not only need to disclose all these assets in India but are also required to report the income you would have earned from these foreign investments. It is quite possible that you would have paid some taxes overseas in the country where you earned such income. In that case you are eligible to claim the credit of such foreign taxes paid against your Indian tax liability on such doubly taxed income where such foreign income is taxed in India. Such credit is available in accordance with the relevant tax treaty. Even in cases, where India does not have treaty with that country, the Indian domestic tax laws still allows you the credit of such foreign taxes. Now the question arises, what should be your approach, where you are falling in above situation. In the following paragraphs, the author has given some guidance on the practical aspects in relation to claiming such foreign tax credit (FTC).

Are you really a resident of India?

First of all you, you need to pay attention whether you indeed qualify to be ordinarily resident? For this purpose, one really needs to look at the past 10 years’ stay details in India and paying careful attention to it is worthwhile.

Even if you become ordinarily resident of India, you still have another test to perform, whether you also qualify to be resident of other country as per the domestic tax laws of that other country. In such a situation, whether your dual residency tie break to that other country as per the relevant treaty. If so, you will become non-resident of India as per treaty and you may not be taxable in India on your global income and hence are saved from FTC hassles.

However, as per Indian tax requirements, you will need to obtain the tax residency certificate from the overseas tax authorities that you are a resident of that other country.

Also read: Income Tax Return filing: 10 tax filing mistakes that can land you in trouble

Common Misses

If you qualify to be an ordinarily resident of India including treaty resident of India, you need to carefully review your foreign income sources including assets, overseas accounts etc. where you may be signatory.

Some of the items generally tax payers miss are for example they have overseas broker account or investment account and interest or dividend is directly credited in that brokerage/investment account. One may generally miss it as it is not hitting one’s bank account.

Another mistake is there may be some taxes withheld on such income (like TDS in India) and tax payers miss it in the absence of adequate knowledge.

Another missing point could be for example, where someone made any switch of asset class viz. in a mutual fund one shifted from debt scheme to equity scheme. In that case, there may be incidence of capital gain or loss.

Therefore, you should carefully scrutinized all your financial transactions. You should obtain and file the updated statements of all your investments in your records and also preserve it so that these are handy when Indian tax authorities want to verify it.

Another important point to note is that where you have claiming the FTC based on estimated basis, ensure that later on while filing the overseas tax returns same has not been claimed as refund or amount has not undergone change. If such refunds are claimed, then you need to pay to the Indian tax authorities the foreign tax credit claimed earlier which was not available to you.

What is available to you is the overseas taxes and not the interest or penalty you might have paid overseas.

It may also be worthwhile to see what is amount of foreign tax credit vis a vis the administrative hassles.

Real Challenge

One of the most common challenge tax payers have to deal is that most of other countries generally follow calendar year to be the tax year and in India the tax year is the financial year. This different time period creates a challenge as to how reporting to be done in India. If reporting is done on calendar year basis, tax authorities can argue that 3 months overseas income is not reported and hence the penal consequences follow. On the other hand, if the income is reported for the 3 months period (Jan-March) on estimated basis or income is included but taxes are reported on estimated basis, tax payers would need to revise their India tax returns to true up the details. Even tax payers face challenge to organize details for these 3 months period and bankers charge them for asking extra statements for the specific periods.

The woes not end here. The India tax return for the tax year 2017-18 can be revised until March 31, 2019. It is quite possible, most of the tax payers may not be able to file their overseas tax return for the 2018 tax year (which include Jan to March 2018 period) by March 31, 2019. In the absence of overseas return, it may be difficult for such tax payers to revise their India returns.

There are some countries such as Singapore, where taxes are determined sometime after filing of Singapore tax return. That practically makes it impossible to claim credit of taxes paid in Singapore, where the same are not paid by the time return is filed or even by March 31, 2019, the revision deadline in India. These are indeed the real practical difficulties which Government needs to clarify and provide guidance. The timeline for revising the 2017-18 or future returns should be relaxed to facilitate tax payers to revise their India tax returns after filing the overseas returns. During audit of India tax returns, tax authorities invariably ask for the overseas tax returns.

Government has been trying hard to make things simpler and easier for tax payers. Considering above, the salaried tax class falling in above situation finds it difficult to handle their tax filings without a professional help.

Foreign nationals have something more to take care

The FTC rules require online submission of Form 67 before filing of return of income where you claim a FTC. This Form 67 needs to be filed by you by logging onto the income tax account and once filed, needs to be electronically verified as well. To complete the e-verification process, you either need to have a digital signature certificate (“DSC”) or an Aadhaar number or a bank notified/ listed by the revenue department or a demat account.

In case of foreign nationals who come to work in India for a limited period of time and go back, the options available for e-verification are not practically feasible. It is very common for these expats to claim FTC. Besides the Aadhaar, this has now become another sore point for them to deal with.

To avoid genuine difficulties in verifying Form 67, the tax authorities should allow to manually submit Form 67 along with ITR V at CPC.

While things are getting simpler day by day and Government is in listening mode, one may hope that Government will address these challenges sooner than later to make the life of tax payers easier.

(Views are personal)

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