Foreign Tax Credit is credit of tax deducted on foreign source income of Indian resident as per laws of foreign country. For example, an Indian entity is providing service to an entity in US. While remitting the payment to Indian entity, US Company may deduct 15% TDS on such amount. Such TDS deducted by US entity in US may be claimed as credit by Indian entity in India subject to certain rules.
CBDT vide its Notification No. 54/2016 dated June 27, 2016 has notified rules for claiming Foreign tax credit (“FTC”) by way of inserting new Rule 128 in Income Tax Rules, 1962. As per the said notification, rules specifying the procedure for grant of relief, deduction of any Income tax paid in any country or specified territory outside India u/s 90, or Section 90A or Section 91, against the income-tax payable under the Act has been prescribed. A new compliance requirement has been inserted for claiming FTC in return of income by way of Form 67 which needs to be filed before filing of return of income.
The summary of the newly inserted rule for claiming FTC is given as under:
- 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, 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, in the manner and to the extent as specified in this rule.
- The credit for foreign tax shall be available against the amount of tax, surcharge and cess payable under the Act but not in respect of any sum payable by way of interest, fee or penalty.
Example: Tax paid in foreign country is Rs 100 and tax income tax, surcharge and cess payable in India is Rs 90, Interest u/s 234B and C is Rs 10, Foreign Tax credit of only Rs 90 would be admissible and no credit is available against interest u/s 234B/C of Rs 10.
- The credit of foreign tax shall be the aggregate of the amounts of credit computed separately for each source of income arising from a particular country or specified territory and given effect to in the following manner:
- the credit shall be the lower of the tax payable under the Act on such income and the foreign tax paid on such income;
- the credit shall be 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.
Example: Tax paid in foreign country is Rs 100 and tax income tax, surcharge and cess payable in India is Rs 90, Foreign Tax credit of only Rs 90 would be admissible.
- In a case where any tax is payable under the provisions of section 115JB or 115JC of the Act, the credit of foreign tax shall be allowed against such tax in the same manner as is allowable against any tax payable under the normal provisions of the Act.
Example: Tax paid in foreign country is Rs 100 and tax income tax, surcharge and cess payable in India is Rs Nil and Tax payable under MAT is Rs 90, Foreign Tax credit of Rs 90 would be admissible.
- Where the amount of foreign tax credit available against the tax payable under the provisions of section 115JB or 115JC exceeds the amount of tax credit available against the normal provisions, then while computing the amount of credit under section 115JAA or section 115JD in respect of the taxes paid under section 115JB or section 115JC, as the case may be, such excess shall be ignored.
Example: Tax paid in foreign country is Rs. 100/- and Tax payable u/s 115JB or 115JC is Rs. 90/- and that payable under normal provisions of the Act is Rs. 40/- then foreign tax credit to the extent of Rs. 90/- will be admissible against tax payable u/s 115JB or 115JC. Further, credit u/s 115JAA or 115JD in a subsequent year, the difference of Rs. 50/ -(foreign tax credit of Rs. 90/- and tax under normal provisions of the Act at Rs. 40/-) shall be ignored and not allowed further credit.
- No credit of any foreign tax shall be allowed unless the following documents are furnished by the assessee, namely:-
- a statement of income from the country or specified territory outside India offered for tax for the previous year and of foreign tax deducted or paid on such income in Form No.67 and verified in the manner specified therein;
- certificate or statement specifying the nature of income and the amount of tax deducted there-from or paid by the assessee,-
(a) from the tax authority of the country or specified territory outside India; or
(b) from the person responsible for deduction of such tax; or
(c) signed by the assessee:
Provided that the statement furnished by the assessee in clause (c) shall be valid if it is accompanied by,- (A) an acknowledgment of online payment or bank counter foil or challan for payment of tax where the payment has been made by the assessee; (B) proof of deduction where the tax has been deducted.
- The statement in Form No.67 and the certificate or the statement shall be furnished on or before the due date specified for furnishing the return of income under sub-section (1) of section 139, in the manner specified for furnishing such return of income.