India – Draft Rules for Foreign Tax Credit

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The Union Budget 2015 had proposed steps to make rules for Foreign Tax Credit (“FTC”) benefits which was a welcome move, especially in a situation when Indian companies have global operations having significant foreign source income/ loss and payment of taxes and excess credits lying with them. The Central Board of Direct Taxes (“CBDT”) on 18th April 2016 has introduced ‘Draft rules for granting relief or deduction of Income-tax under section 90/ 90A/ 91 of the Income-tax Act’. Following is a brief outline of the same:

An assessee being a resident shall be allowed a credit for the amount of any foreign tax paid by him in a country or specified territory outside India:

o   by way of deduction or otherwise,

o   in the year in which the income corresponding to such tax has been offered to tax or assessed to tax in India.

‘Foreign tax’ means:

o   Tax covered under DTAA w.r.t. countries/ territories with which India has a DTAA;

o   Tax payable in any other country under the law in force in that country.

Credit for foreign tax is available against amount of tax, surcharge and cess payable under the Income Tax Act, 1961 (“ITA”) but is not available against any sum payable by way of interest, fee or penalty.

No credit for disputed amounts of foreign tax.

Credit of foreign tax shall be the aggregate of amounts of credit computed for each source of income in a particular territory and shall be the lower of the tax payable under ITA and the foreign tax payable.[1]

For tax payable under section 115JB or 115JC of ITA, credit for foreign tax shall be allowed in the same manner as that allowed for any other income under ITA.

Documents required for availing tax credit:

Certificate from the tax authority of the relevant a country or specified territory outside India specifying the nature of income and the amount of tax deducted therefrom or paid by the assessee. (where the foreign tax is deducted at source, the assessee may furnish a certificate of tax deducted from the person responsible for deduction of such tax);

Acknowledgement of online tax payment or bank counter foil or slip or challan for tax payment where the payment of foreign tax has been made by the assessee; and

A declaration that amount of foreign tax in respect of which credit is being claimed is not under any dispute.

[1] Determined by conversion of the currency of payment of foreign tax at the telegraphic transfer buying rate on the date on which such tax has been paid or deducted.

Source: STBN