A Tryst with Foreign Tax Credit
After our post on Investing in US Stocks, we got a lot of questions about how to claim foreign tax credit (FTC). This post answers all the questions you may have
In India, there's 2 basic routes to claim Foreign Tax Credit (DTAA and Section 91 route).
If India has entered into a Double Taxation Avoidance Agreement (DTAA) with a country, the DTAA usually contains a special article for claiming of Foreign Tax Credit.
Section 91 applies in cases where India has not entered into a DTAA with the country (Suo-moto FTC)
Without getting into the nitty gritties of the DTAA or Income Tax Act provisions, let's look at the prescribed rules for claiming FTC:
FTC is to be allowed in the year in which the income corresponding to such tax has been offered or assessed to tax in India Straight forward right? You get tax credit in the year you offer income to tax.
FTC shall be available against the amount of tax, surcharge and cess payable under the Indian tax laws but not against interest, fee or penalty Again, logical. Though what catches people off guard is "interest". This means while you can use FTC to set off your tax liability, interest under 234A/ 234B/ 234C is still leviable.
FTC shall not be available if the foreign tax is a disputed one For example, if you have US sourced income and your tax return is under an IRS audit, you might not be able to claim FTC for this.
FTC is available even on tax payable under Section 115JB (Minimum Alternate Tax) Self explanatory to be honest.
FTC shall be the aggregate of the amounts of credit computed separately for each source of income arising from a particular country Just a fancy way of saying calculate tax on each of your sources of income.
FTC shall be lower of, tax payable on such income under the Indian tax laws and the foreign tax paid This sounds complicated but is logical. Basically, if your Indian tax is INR 1,000 and you have FTC of INR 1,500; India isn't going to refund the tax you paid to another country.
FTC shall be determined by conversion of the currency of payment of the 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. You'll remember from our earlier article that the SBI TT Buying rate is used for most currency conversions. Same concept applies.
Now what's this Form 67 ?
Form 67 is an electronic form that has to be submitted before filing your Income tax return. The form basically requires you to fill each source of income and foreign tax credit point by point.
Practical Issues
While the above is a good theoretical guide to claiming Foreign Tax Credit, there are a few practical difficulties when it comes to actually claiming FTC. We would love to make a definitive guide dealing with such issues, however, the solution varies from situation to situation and from client to client. Some common issues we've seen in the past are listed below:
Difference in Tax years - India follows the Financial Year, while other countries may follow the Calendar Year. Taxpayers may have to recompute taxes paid in Foreign countries on a Financial Year basis. This exercise might be a little complicated.
CPC Bangalore cannot process ITRs with FTC - CPC-Bangalore does not have the ability to process Income Tax Returns which claim FTC since they do not have enough data. The return is usually transferred to the Assessing Officer and.. we know how that works in this country at this point of time (Let's wait for faceless assessments!).
Difficulties in substantiating Foreign Taxes paid - An assessee may have difficulty in explaining foreign tax provisions to assessing officers which may make the process of claiming FTC more tedious.
Foreign Tax provisions and deductions - The deductions available against foreign taxes may bring down the effective tax rate. However, Form 67 asks you to enter details source wise. This mismatch may result in claiming higher FTC than actual tax paid. This would lead to further complications as you may not be able to justify why such higher FTC has been claimed.
If you need help with filing your ITR or Form 67, feel free to reach out to us!
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