If you have paid or accrued foreign taxes 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, you may be able to take either a credit or an itemized deduction for those taxes.
Characteristics of FTC
- FTC is
a method for elimination of double taxation.
- Credit
for the amount of any foreign tax paid in the source country against the
taxes to be discharged in the residence country.
- In
India income tax system, tax Residents and Ordinary Residents (ROR) on
worldwide income and offer FTC to tone down the potential for double
taxation of income.
- It can
be adjusted against tax, cess and surcharge payable under the Income Tax
Act.
- It
cannot be adjusted against interest, fee or penalty payable under the Act.
- It is
not available in case foreign tax or part thereof is disputed by the
assessee in any manner.
Conditions to avail FTC
For a tax payer to be eligible for FTC:
For a tax payer to be eligible for FTC:
- He must
have made a payment to a foreign government;
- The
payment must be towards an income tax, or a tax in lieu of an income tax;
and
- It is
permissible in the year where income is offered in India by the assessee
within six monthsfrom the end of the month.
Regulations governing FTC
- Section
91includes the tax credit for countries where no DTAA
is in force.
- Section
90includes the tax credit for countries where India
has entered into a Double Tax Avoidance Agreement (DTAA).
- Rule
128along with Form 67 was introduced in 2016 and
came into force on 4.2017
Before the introduction of Rule 128 and Form 67, these
provisions were there in the Income Tax Act but no specific rules governing
mechanism for determining foreign tax credit.
Unilateral tax credit system in India (Section 91
of Act)
Preconditions
- Available
to a tax resident of India.
- Available
in respect income accruing or arising outside India.
- Actual
tax payment in foreign country on such income.
- Tax
liability resulting in tax payment in India (i.e. income is actually
doubly taxed).
- No DTAA
with the foreign country in which tax is paid.
Quantum of relief
- Proportionate
relief at lower of ‘Indian tax rate’ or ‘foreign tax rate’.
- Not
full credit.
Bilateral agreements elimination of double taxation (Section 90
of Act)
Two methods envisaged by Model convention – Choice left
to the treaty partners.
Exemption method
|
Credit method
|
Focus is on income.
|
Thrust is on taxes and not on income.
|
Full exemption is granted. Doubly taxed income do not
form part of resident country tax computation.
|
Full credit is granted. Deduction allowed for taxes
paid in the source country.
|
Exemption with progression. Resident country considers
doubly taxed income only for the purposes of rate determination.
|
Ordinary credit is granted. Deduction quantified with
relevance to resident country tax on double taxed income. Most of the DTAAs
provide for this model of relief.
|
Taxes retained at the level imposed by source country.
|
Equality in treatment of capital investment whether
made within or outside resident country. If the source country has lower tax
rate, overall taxes are increased to that prevailing in the resident country
while if source country has higher tax rate, credit is restricted to taxes
prevailing in resident country.
|
Losses incurred in source country can be adjusted.
|
Losses incurred in source country can lead to “double
dip”.
|
Form-67
Documents required to claim FTC
- Form 67
fully verified and certified by a Charted Accountant (CA) on or before
furnishing the tax return.
- Produce
a certificate issuedby the concerned tax authority of the foreign country
or the specified territory or from the person who is responsible for the
deduction (ex. employer) that includes (i) Nature of foreign income and
(ii) the amount of TDS.
- A proof
of payment of foreign tax.
Few key points
- Form 67
is to be filed electronically.
- It is
to be filed on or before due date of filing Income Tax Return.
- It is
available on the e-filing portal itself.
- Electronic
Verification Code (EVC) or a Digital Signature Certificate (DSC) is
required to be filed.
- It
should be submitted before filing of Income Tax Return.
This is a complex compliance; you can seek help from our tax
experts to claim your FTC.
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