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Foreign Tax Credit

Introduction

Due to the impact of rapidly increasing foreign trade and commerce, cross border transactions raises many issues on taxation of the income.

Global income is taxed in the country of its residence. But there are situations when a Company/Individual is also exposed to tax in the source country. Hence, there arises issue of double taxation. To avoid the impact on smooth flow of cross border transactions, countries have entered between themselves Double Tax Avoidance Agreements (DTAA) as a solution to address this problem. DTAAs determine taxation right between the country of residence and country of source. This allows the taxpayer to take credit of any income tax paid by him outside his country of residence commonly termed as Foreign Tax Credit. 

Foreign Tax Credit (FTC)

FTC is tax paid in foreign country on income derived in foreign country by an assessee. It can also be tax deducted at source in the foreign country by a non-resident on the source of income generated by a resident in foreign country. Such amount of tax which is paid/deducted in foreign company can be claimed as credit against the tax liability in the country of resident.

  • The credit of FTC is available in the year in which the income corresponding to such tax has been offered to tax in India.
  • In case the income corresponding to such tax is offered to tax in India in multiple years, the FTC shall be claimed across those years in the same proportion in which the income is offered to tax.

Mechanism to compute the amount of FTC available

  • The FTC shall be computed for each source of income arising from each country.
  • The credit allowable shall be lower of tax payable under the Income Tax Act on such income and actual foreign tax paid on such income.
  • In case where the foreign tax paid exceeds the amount of tax payable according to the Double Tax Avoidance Agreement, such excess shall be ignored.

Conversion rate to be adopted

  • For the purpose of converting foreign currency into Indian rupee, Telegraphic Transfer Buying Rate on the last day of the previous month in which the tax has been paid or deducted shall be adopted.
  • Telegraphic Transfer Buying rate is the rate adopted by the State Bank of India for buying such currency.

Documents are required to claim FTC

  • A Statement of computation of Income of that country outside India and foreign tax deducted or paid on such income in Form No. 67;
  • A certificate or statement specifying the Nature of Income and the manner of tax deducted there from or paid by the assessee from –

      a. The tax authority of that country or

      b. The person responsible for deduction of such tax or

      c. The assessee. In such case, the assessee also need to provide

  • Acknowledgement of online payment of tax or bank counter foil or challan for payment of tax where the payment has been made by the assessee:
  • Proof of deduction of tax where the tax has been deducted.

Liabilities against which FTC is allowed

  • The FTC can be claimed against amount of Income Tax, surcharge and cess liability. It, however, cannot be claimed against any liability on account of interest, fee or penalty payable under the Income Tax Act.
  • If foreign tax is disputed in any manner, the same cannot be claimed against tax liability in India. However, once the dispute is settled, the credit for such tax can be claimed in the year in which income is offered for tax in India on furnishing of evidence of settlement of dispute, proof of payment of such disputed tax and requisite undertaking.
  • FTC shall be allowed against tax payable under MAT in the same manner as it is allowable under normal provisions of the Income Tax Act.
  • However, where the FTC available against tax payable under MAT exceeds the tax credit available under normal provisions of the Act, the excess shall be ignored.

Timeline to submit the claim of FTC

The statement in Form No. 67 and a certificate or statement as referred above shall be furnished on or before the due date specified for furnishing return of income under section 139 (1) of The Income Tax Act. This form needs to be filed online.