Allowability of foreign taxes paid as business expenditure under the Income-tax Act, 1961 – A possibility?

Sudeep Das & Ashwath Pai – [2021] 132 taxmann.com 236 (Article)

The Indian economy, for a considerable period, has been a captivating investment destination for various multinational corporations. The Government is trying to consolidate India’s position as a favourable investment destination with reforms such as corporate tax rate cuts, improvements in the rank of ease of doing business, and strengthening insolvency provisions.

On the flipside, various surveys indicate the list of Indian companies investing abroad is on a rise considering the benefits accruing from global investing. As per Reserve Bank of India (RBI) data1, during June 2021, India Inc.’s overseas direct investments stood at a whopping US$ 2.8 billion, registering a 2x YoY growth. Out of the total investments, loans accounted for US$ 1.21 billion, equity capital accounted for US$ 426.84 million and issuance of guarantees stood at US$ 1.17 billion. Majority of the investments is attributable to information technology and manufacturing sector. Investing abroad has its own challenges from regulatory standpoint. From tax standpoint, non-allowability of taxes paid abroad as a credit in India remains a critical issue to be considered.

Therefore, during this period, it is important to understand the Indian income-tax implications on the foreign taxes paid by an Indian entity. This article attempts to discuss certain instances when foreign taxes paid are not eligible as credit against Indian taxes, and whether a possible alternative is available to the taxpayer.

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