Foreign Tax Credit

Background of Foreign Tax Credit: 

Sec 295 of the Income Tax Act gives power to the Board to make rules for the whole or any part of India for carrying out the purposes of this Act. In Sec 295(2), new clause (ha) inserted by the Finance Act 2015 through which the power given to Board to lay down the procedure for granting of relief or deduction, as the case may be, of any income tax paid in any country or specified territory outside India u/s 90 or 90A or u/s 91 against the income tax payable under this Act. With this Statutory power, Rule 128 inserted in Income Tax Rules w.e.f. 1-4-2017. The provision of Rule 128 are as follows:

Applicability of Foreign Tax Credit: 

Rule 128 is applicable to a resident assessee and such assessee shall be allowed a credit for the amount of any foreign tax paid by him in a country or specified territory outside India, by way of deduction or otherwise, in the year in which the income corresponding to such tax has been offered to tax or assessed to tax in India, in the manner and to the extent as specified in this rule.

Meaning of Foreign Tax: 

Foreign tax in respect of a country with which India has entered into an agreement for the relief or avoidance of double taxation of income in terms of u/s 90 or u/s 90A, the tax covered under the said agreement; or in respect of any other country the tax payable under the law in force in that country in the nature of income-tax referred to in clause (iv) of the Explanation to section 91.

Amount of Tax: 

The credit shall be available against the amount of tax, surcharge and cess payable under the Act but not in respect of any sum payable by way of interest, fee or penalty.

Foreign Tax for more than one year: 

In a case where income on which foreign tax has been paid or deducted, is offered to tax in more than one year, credit of foreign tax shall be allowed across those years in the same proportion in which the income is offered to tax or assessed to tax in India.

Disputed Tax: 

Foreign Tax Credit shall not be available in respect of an amount which is disputed in any manner by the assessee. The credit of such disputed tax shall be allowed for the year in which such income is offered to tax or assessed to tax in India if the assessee within six months from the end of the month in which the dispute is finally settled, furnishes evidence of settlement of dispute and an evidence to the effect that the liability for payment of such foreign tax has been discharged by him and furnishes an undertaking that no refund in respect of such amount has directly or indirectly been claimed or shall be claimed. 

Quantum of Foreign tax Credit: 

The credit shall be the aggregate of the amounts of credit computed separately for each source of income arising from a particular country and shall be given to the extent the lower of the tax payable under the Act on such income and the foreign tax paid on such income. If the amount of foreign tax paid exceeds the amount of tax payable in accordance with the provisions of the agreement for relief or avoidance of double taxation, such excess shall be ignored for the purposes of this computation.

Conversion Currency: 

The credit shall be determined by conversion of the currency of payment of foreign tax at the telegraphic transfer buying rate on the last day of the month immediately preceding the month in which such tax has been paid or deducted.

Credit in case of MAT or AMT: 

In a case where any tax is payable under the provisions of section 115JB or section 115JC, the credit of foreign tax shall be allowed against such tax in the same manner as is allowable against any tax payable under the normal provisions of the Act. Where the amount of foreign tax credit available against the tax payable under the provisions of section 115JB or section 115JC exceeds the amount of tax credit available against the normal provisions, then while computing the amount of foreign tax credit in respect of the taxes paid under section 115JB or section 115JC, as the case may be, such excess shall be ignored.

Documents required for FTC: 

Credit of any foreign tax shall be allowed on furnishing the following documents by the assessee, namely: – (a) a statement of income from the country outside India offered for tax for the previous year and of foreign tax deducted or paid on such income in Form No.67 and verified in the manner specified therein;   (b) certificate or statement specifying the nature of income and the amount of tax deducted therefrom or paid by the assessee from the tax authority of the country outside India; or from the person responsible for deduction of such tax; or signed by the assessee with an acknowledgement of online payment or bank counter foil or challan for payment of tax where the payment has been made by the assessee or proof of deduction where the tax has been deducted.

Due Date: 

The statement in Form No.67 shall be furnished on or before the due date specified for furnishing the return of income under sub-section (1) of section 139, in the manner specified for furnishing such return of income.

Carry backward of loss: 

Form No.67 shall also be furnished in a case where the carry backward of loss of the current year results in refund of foreign tax for which credit has been claimed in any earlier previous year or years.

Online filing of Form 67: 

All assessee’s who are required to file return of income electronically u/s 139(1) are required to prepare and submit Form 67 online along with the return of Income if credit for the amount of any foreign tax paid by the assessee in a country outside India by way of deduction or otherwise, in the year in which the income corresponding to such tax has been offered to tax or assessed to tax in India.

Submission of Form 67: 

Form 67 shall be available to the assessee’s login. The assessee is required to login into the e-filing portal using their credentials. Select Form 67 in the option “Form other than ITR”. The form is to be signed digitally and submitted by clicking “submit” button.   

Author: CA Sachin Sinha