SKP Tax Alert
Volume 9 Issue 1 |
CBDT issues draft rules for grant of Foreign Tax Credit in certain situations
Foreign Tax Credit (FTC) assumes significance when a person earns income from more than one jurisdiction. A resident is generally taxed on his worldwide income and hence, it is the country of residence that typically provides relief from double taxation (i.e. taxed once in the country of source of income and again in the country of residence). Practically, while claiming FTC, a host of issues surface such as different tax years, differences in the interpretation of treaties, methods of documentation for claiming credit, changes in the characterisation of income, etc.

To improve the ease of doing business and reduce litigation surrounding FTC, the Central Board of Direct Taxes (CBDT) had set up a committee to suggest the methodology for granting FTC after examining the various issues related to it. Considering the report submitted by the committee and the provisions of the Income Tax Act (the Act), the CBDT released draft rules[1] that would allow resident taxpayers to claim deduction or credit for taxes paid in foreign jurisdictions.

Key highlights of the draft rules 
  • Foreign tax shall mean,
    • in respect of a country or specified territory with which India has entered into a Double Taxation Avoidance Agreement[2] (DTAA), the tax covered under the said DTAA;
    • in respect of any other country or specified territory, the tax payable under the law in force in that country in the nature of income tax referred to in section 91 (which includes any excess profit tax or business profit tax charged on profits by that country).
  • A resident shall be allowed FTC, 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.
  • FTC 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.
  • No FTC shall be available in respect of amounts disputed by the taxpayer.
  • FTC 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:
    1. FTC shall be the lower of the tax payable under the Act on such income and the foreign tax paid on such income;
    2. FTC shall be determined by conversion of the currency of payment at the telegraphic transfer buying rate on the date on which such tax has been paid or deducted.
  • FTC shall also be allowed for tax payable under the provisions of Minimum Alternate Tax (MAT)/Alternate Minimum Tax (AMT).
  • Where tax is payable under the provisions of MAT/AMT, the excess of FTC over the same shall be ignored while computing the amount of MAT/AMT credit.
  • Allowability of FTC shall be subject to the submission of the following documents:
    • Certificate from the tax authority of a country or specified territory outside India specifying the nature of income and the amount of tax deducted therefrom or paid by the assessee. In a case where foreign tax is deducted at source, the resident may furnish a certificate of tax deducted from the person responsible for deduction of such tax;
    • Acknowledgement of online tax payment or bank counterfoil or slip or challan for tax payment where the payment of foreign tax has been made by the resident; and
    • A declaration that the amount of foreign tax in respect of which credit is being claimed is not under any dispute.
The CBDT has invited comments and suggestions of stakeholders and the general public on the draft rules above by 2 May 2016 by email or post.

[1] F.No. 142/24/2015-TPL dated 18 April 2016
[2] In terms of section 90 or 90A of the Act
SKP's comments
The draft rules bring much-needed clarity on several aspects which have been a matter of substantial litigation causing hardship to taxpayers. These steps re-emphasise the government’s commitment towards the ease of doing business in India and reinforces the confidence of having a conducive tax environment.

The following aspects of the draft rules are the most significant:
  • Allowability of FTC against tax payable under MAT/AMT provisions
  • FTC shall be available against the amount of surcharge and cess.
However, it would be helpful if the rules could also deal with the aspects of allowability of FTC with respect to the following:
  • In the hands of partnership firms which are treated as fiscally transparent entities in foreign jurisdictions (i.e. taxes are paid in the source country by the partners);
  • Incomes which are eligible for deduction under section 10AA, etc.;
  • Credit for foreign state level taxes; and
  • Credit of branch profit tax paid by foreign branches of Indian companies.
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