How to claim taxes paid outside India?

The concept of work from home has gained popularity greater than ever before. Further, it has now evolved from ‘work from home’ to ‘work from anywhere’. Not just salaried Individuals, businesses are also being run successfully from anywhere without any physical presence. Businesses have become seamless geographically.

Different nations have their own tax rules, according to which a particular income is taxed and there might be a situation where an income might be taxable in two or more countries in accordance with their respective tax laws.

This arises a few questions in our mind

1. How is it decided that a particular income will be taxed in which country?

2. Can there be double taxation, i.e., can an income be taxed in two countries?

3. If the income is taxed in two countries, is there any remedy?

4. How to claim credit of taxes paid outside India?

In this article, we will address the above questions, with an aim to provide a basic understanding.

1. How is it decided that a particular income will be taxed in which country?

Every country has their own tax laws which provides for the taxation of income. It tells how & which income will be taxed in a particular country. So, to decide the taxability of income, these laws must be referred.

 2. Can there be double taxation, i.e., can an income be taxed in two countries?

Since each country has their own tax laws, it is quite probable that a particular income is taxable in two countries. That is why, countries have entered into agreements which are commonly known as Double Taxation Avoidance Agreements (DTAA), with an aim to avoid double taxation of a particular income.

These agreements are entered between the countries and lays down the principles & rules on basis which income will be taxed & double taxation will be avoided (in situations where income is otherwise being taxed in both the countries)

3. If the income is taxed in two countries, is there any remedy?

The DTAA provides for relief in case of double taxation. These are broadly given in the form of Exemptions and Tax credit

Under Exemptions, one country renounces its rights to tax the income.

While under tax credit, one country allows the foreign tax credit, which could be either full or partial.

Also Read: Tax implication on Dropshipping Business in India

4. How to claim credit of taxes paid outside India?

Where a resident in India has paid taxes outside India or his/her tax has been withheld/deducted in the foreign country, such tax can be claimed as credit while filing ITR in India. This will reduce the burden of tax & save from double taxation.

5. What do we need to do to claim the foreign tax credit?

Form 67 needs to furnish anytime during the relevant assessment year to claim the above credit.

Form 67 needs to be supported/accompanied by the following.

• Tax residency certificate (TRC)
• Statement showing the foreign income, that is subject to tax in foreign country.
• Proof of tax paid/deducted outside India.
• Certificate Showing the nature of the income and the amount of tax deducted or paid by the taxpayer from the foreign country’s tax authority or the person responsible for the deduction of such tax, or signed by the taxpayer.

6. What needs to be kept in mind for claiming the credit?

One must acknowledge that claiming the credit isn’t the difficult part. It is pertinent that:

– We understand whether we are eligible for the credit.

– We understand the provisions of DTAA & use them to our benefit.

– Complete & accurate documents are provided while claiming the credit

– ITR is filed with provision of required information in conformity with the form 67.

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Disclaimer: The above post is only for the purpose of academic discussion and should not be construed as any legal opinion in any matter whatsoever.

The author is a CA in practice at Delhi and can be contacted at: E-mail: abhinandansethia90@gmail.com, Mobile: +91-9811741451