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While I was going to Mumbai I was sitting across an IT professional who was an expatriate. On making him know about my background (tax professional), he stood up and I could make out that the next two hours in the flight are going to be a Q&A session. While I could understand his exasperation on the enormous tax provisions which existed in cross border transactions, what stood out was that there was a lot of confusion on the foreign tax credit rules.
Central Board of Direct Taxes (CBDT) has recently come out with foreign tax credit (FTC) rules which might be a great relief for a number of expatriates. Before deep diving into the new rules, I thought of giving a purview on the source of these rules, i.e. the issue of double taxation.
In the present era of cross border transactions across the world, where every country seeks to increase its tax share, more often than not, there arise situations wherein one income is taxed twice. The following are the situations/ circumstances where there is double taxation:
The following are the options available to a taxpayer to claim the relief from double taxation:
Q1. What constitutes FTC?
Ans. In respect of a country with which India has entered into a DTAA – FTC covers taxes covered under that tax treaty. In respect of any other country – FTC covers the tax payable under the law in force in that country in the nature of income tax.
Q2. What is the mode of payment of foreign tax?
Ans. Direct payment of tax or by way of deduction
Q3. In which year is the FTC available?
Ans. FTC shall be available to the taxpayer in the year in which the income corresponding to such foreign tax has been offered/ assessed to tax in India.
Where the income corresponding to foreign tax is offered to tax in more than one year, FTC shall be available across those years, in proportion to the income offered/ assessed to tax in India
Q4. FTC is available against which taxes?
Ans. FTC shall be available against the amount of tax, surcharge and cess payable under the Income-tax Act, 1961 (the Act). FTC shall also be allowed against tax payment under Minimum Alternate Tax (MAT)/ Alternate Minimum Tax (AMT) provisions
Q5. Against which items, FTC is not availabale?
Ans. FTC is not available against the following:
Q6. What is the treatment of disputed Foreign tax?
Ans. Credit of disputed foreign tax shall be available for the year in which the corresponding income is offered to tax or assessed to tax in India, if the taxpayer furnishes the following evidence within 6 months from the end of the month in which disputed foreign tax is finally settled:
An undertaking that no refund in respect of such amount has been directly/ indirectly claimed or shall be claimed by the taxpayer
Q7. What is the mode of computation of FTC?
Ans. Total available FTC shall be the aggregate of the amounts of FTC computed separately for each source of income arising from a particular country.
FTC shall be the lower of:
Where the foreign tax paid exceeds the amount of tax payable under the provisions of tax treaty, such excess amount shall not be considered.
Q8. What are the documents required to claim FTC?
Ans. The taxpayers shall be required to furnish following documents on or before due date of filing of tax return under the Act:
FTC has always been a moot point of discussion in the litigative circles due to involvement of different countries and their respective tax jurisdictions. Though, we have various judicial precedents in India which clarifies various contexts and computation dilemmas, the concept still has its own nuisances.
While the real plight would only be revealed once the FTC rules are operational (with effect from 1st April 2017), CBDT has tried to bring a lot of clarity and uniformity with these rules. This should reduce the litigations and confusions to a great extent, hence, definitely a welcome move.