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How to claim foreign tax credit in India

Foreign Tax Credit (‘FTC’)

According to a Ministry of External Affairs report, there are 32 million NRIs and OCIs residing outside India. Many Indian residents migrated abroad to countries like USA, UK, etc., for  a higher level of education purpose, for business or for employment purpose. Also, some companies may have global business operations and the global income may be taxed in two countries i.e., in source country as well as residence country. This envisaged the need for Foreign Tax credit rules. A person can avail the benefit of foreign tax credit i.e., availing tax benefit for the tax to be paid in other country for the taxes already paid in one country.

Availing Foreign Tax Credit (‘FTC’) in case of assessee’s with cross border transactions was contentious issue. In order to provide clarity, CBDT has notified Rule 128 of the Income Tax Act, 1961 vide Notification No. 54/2016 dated 27th June 2016 which is effective from 1st April 2017. This will help in reducing litigation and shall avoid double taxation and encourage international transactions.

AVAILABILITY OF Foreign Tax Credit (‘FTC’)

In this article, we have discussed all about how to claim foreign tax credit in India. Assessee can avail FTC against the amount of tax, surcharge, and cess payable by such assessee in India under the Act. However, it has been clarified that FTC will not be allowed in respect of any sum payable by way of interest, fee, or penalty. Also, credit shall not be available in respect of any amount of foreign tax which is disputed in any manner by the assessee. However, the credit of such disputed tax shall be allowed for the year in which such income is offered to tax or assessed to tax in India if the assessee within 6 months from the end of the month in which the dispute is finally settled, furnishes relevant evidence, statements and undertaking that no refund for such amount has been or shall be claimed.

COMPUTATION OF FOREIGN TAX CREDIT

 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. The credit allowable shall be the lower of the tax payable under the Act on such income and the foreign tax paid on such income. In case foreign tax paid exceeds the tax payable under relevant DTAA, then the excess tax shall be ignored. Further, the credit shall be determined by conversion of the currency of payment of foreign tax at the telegraphic transfer buying rate on the last day of the month immediately preceding the month in which such tax has been paid or deducted.

DOCUMENTS FOR AVAILING OF FOREIGN TAX CREDIT

For claiming FTC, assessee shall be required to furnish following documents: –

a) Statement of income from a country or specified territory outside India and Foreign Tax deducted or paid on such Income in Form No. 67.

b) Certificate or statement specifying the nature of income and amount of tax deducted therefrom or paid by the assessee –

I) From the tax authority of the country or specified foreign territory or,

ii) From the person responsible for deduction of such tax or,

iii) Signed by the assessee along with acknowledgment of online tax payment or bank counterfoil or challan for tax payment where the payment of has been made by the assessee and proof of deduction where the tax has been deducted.

c) Proof of payment of taxes outside India.

Form No. 67 and the certificate and statement referred above shall have to be furnished online on or before the due date of filing of return of income. Form 67 shall also be furnished where carry backward of loss of the current year results in a refund of FTC claimed in earlier years.

Frequently Asked Questions

File Form 1116, Foreign Tax Credit, to claim the foreign tax credit if you are an individual, estate or trust, and you paid or accrued certain foreign taxes to a foreign country or U.S. possession. Corporations file Form 1118, Foreign Tax Credit—Corporations, to claim a foreign tax credit.

Availing Foreign Tax Credit (‘FTC’) in case of assessee’s with cross border transactions was contentious issue. You can claim a credit only for foreign taxes that are imposed on you by a foreign country or U.S. possession. Generally, only income, war profits and excess profits taxes qualify for the credit.

  1. A statement of foreign income offered to tax and foreign tax deducted or paid on such income in Form No. 67.
  2. Certificate or statement specifying the nature of income and the amount of tax deducted therefrom or paid by the taxpayer: From the tax authority of the foreign country and from the person responsible for the deduction of such tax with signed by the taxpayer.
  3. Proof of payment of taxes outside India.

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