The Finance Bill 2024 proposes an amendment to section 198 of the Income-tax Act to address the issue of underreporting income due to foreign taxes. Currently, while taxpayers may claim a credit for taxes withheld outside India, they sometimes fail to include these amounts in their total income, resulting in a discrepancy between reported and actual income. To rectify this, the amendment stipulates that all sums deducted under Chapter XVII-B and income tax paid abroad for which a credit is claimed must also be deemed as income received for the purpose of calculating the assessee’s total income. This change, effective from April 1, 2025, aims to ensure that foreign taxes withheld are accurately reflected in income calculations, preventing double deductions and improving tax compliance.
Budget 2024: Inclusion of taxes withheld outside India for purposes of calculating total income
Section 198 of the Act provides that all sums deducted (tax deducted), in accordance with the provisions of Chapter XVII-B shall, for the purpose of computing the income of an assessee, be deemed to be income received.
2. It was seen that some assessees are not including taxes withheld outside India for the purposes of calculating their total income which was leading to under reporting of total income as only their net income was being offered for taxation. However they were claiming credit for the taxes withheld abroad resulting in double deduction on account of income not being included in total income but credit for foreign taxes withheld was being taken.
3. In order to address this issue, it is proposed to amend section 198, to provide that all sums deducted in accordance with the provisions of Chapter XVII-B and income tax paid outside India by way of deduction, in respect of which an assessee is allowed a credit against the tax payable under the Act, are for the purpose of computing the income of the assessee, deemed to be income received.
4. The amendment will take effect from the 1st day of April, 2025.
Extract of Clause 66 of Finance Bill 2024
Clause 66 of the Bill seeks to amend section 198 of the Income-tax Act relating to tax deducted is income received. The said section provides that tax deducted as per provisions of Chapter XVII-B shall, for the purpose of computing the income of an assessee, be deemed to be income received.
It is proposed to amend the said section so as to provide that all sums deducted in accordance with the foregoing provisions of the said Chapter and income tax paid outside India by way of deduction and in respect of which an assessee is allowed a credit against the tax payable under the said Act, shall for the purpose of computing the income of the assessee, be deemed to be income received.
This amendment will take effect from 1st April, 2025.
Proposed Amendment to section 198 of Income Tax Act, 1961 vide Finance Bill, 2024
In section 198 of the Income-tax Act, after the words “this Chapter”, the words “and income tax paid outside India, by way of deduction, in respect of which an assessee is allowed a credit against the tax payable under this Act,” shall be inserted with effect from the 1st day of April, 2025.
