Foreign tax credits
/ Taxation

What is Foreign Tax Credit (FTC)?

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:

  • 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.