With globalization, people and corporates venturing abroad for work and to explore foreign markets is common. This brings a need to pay taxes on income earned in foreign countries.
The question is, if an Indian resident earns income and pays taxes abroad, can he claim credit of the taxes paid in foreign countries and if yes, then how to claim credit of foreign taxes paid.
This article aims to throw light on the laws governing foreign tax credit and the procedural requirements to claim foreign tax credit.
If an Indian resident earns income outside India, then such income is taxable in India also, because a resident has to pay taxes on his global income as per the Indian Income Tax Act. This brings the concept of doubly taxed income as such income earned outside India is also taxed in India.
To mitigate the effect of the same income being taxed twice, the credit of taxes paid in foreign countries on such doubly taxed income is allowed to ensure that there are no undue taxes paid on doubly taxed income.
Tax credit or relief of taxes paid outside India is available u/s 90 to 91 of the Income Tax Act’1961 and Rule 128 of the Income Tax Rules.
According to Section 90,
“1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,—
(a) for the granting of relief in respect of—
(i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or
(ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or
(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in the said agreement for the indirect benefit to residents of any other country or territory), …..”
Therefore, section 90 talks about Double taxation avoidance agreements that India may enter with foreign countries to grant relief in respect of income which has been taxed both in India and abroad. This relief is by way of granting credit of taxes paid in one country from the taxes due in another country on the same income which is taxed in the other country also or by way of reducing the tax rates on such doubly taxed income.
Therefore, to put it in a simple way credit of taxes paid outside India in a country with which India has a Double Taxation Avoidance Agreement (DTAA) is available in Section 90.
This also includes some specified territories with which India may have a DTAA.
Similarly, there is section 91 subsection (1) of which reads as under:
(1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.
To put it in simple words, credit of taxes paid in a country with which India does not have a DTAA is available under this section. This section gives relief on taxes paid in such countries on incomes accruing arising in those countries and provides a mechanism for calculating tax relief or credit in absence of DTAA.
Tax credit or Tax relief available under section 90 or 91 is generally lower of the following amounts:
1) Tax paid on doubly taxed income outside India.
2) Tax payable on doubly taxed income under Income Tax Act.
Therefore, tax relief on doubly taxed income will be equal to taxes paid outside India if the taxes due on such income is more under the Indian Income Tax Act’1961 and if tax payable in India on such doubly taxed income is less than taxes paid outside then tax relief will be equal to the taxes calculated under the Income Tax Act’1961.
Ques: What are some of the other important things to be kept in mind for taking credit u/s 90/91 of the Income Tax Act, 1961?
Ans: Some other Important things to be noted for taking Tax credit u/s 90/91 are:
Ques: What are the procedural requirements for taking foreign tax credit?
Ans: Procedural requirements for taking credit of taxes paid abroad is given in Rule 128 of the Income Tax Rules.
The credit of foreign taxes shall be available by filing Form 67 and filing the Income Tax return. Form 67 for claiming foreign taxes shall be filed on or before the due date of filing the return of income under section 139(1).
Credit of foreign taxes may not be available if form 67 is not filed within the due date of ITR.
Form 67 is available for filing in the online mode on the IT Portal.
Some documents to be attached with Form 67 for claiming FTC are:
1) Certificate or statement specifying the nature of income and the amount of tax deducted therefrom or paid by the assessee.
a) This statement specifying nature of income and tax paid in foreign country can be the return of income filed in the foreign country or certificate issued by the foreign tax authority.
(b) This can also be a certificate of tax deduction from the person responsible for deducting such tax in the foreign country just like Form 16/16A/16C furnished in India i.e TDS/TCS certificates or some other certificate specifying income and taxes.
c) In absence of the above-mentioned documents, the person claiming the credit of foreign taxes can also furnish self-attested/self-signed statement specifying the income offered and taxes paid abroad, but the said statement shall be valid only if it is accompanied by:
(i) an acknowledgement of online payment or bank counter foil or challan for payment of tax where the payment has been made by the assessee;
(ii) proof of deduction where tax has been deducted.
Form No.67 shall also be furnished in a case where the carry backward of loss of the current year results in refund of foreign tax for which credit has been claimed in any earlier previous year or years.
Form 67 is a simple form for claiming Foreign tax credit which asks for all the basic information mentioned above like:
a) Source and amount of income earned abroad in INR
b) Taxes paid outside India in INR
c) Country in which taxes are paid
d) Exchange rate for computation of tax credit
e) Tax payable on such income in India under normal provisions also under section 115JB/115JC where applicable.
f) Article of DTAA where tax credit is claimed as per the Double taxation avoidance agreement.
g) Rate of tax as per DTAA.
h) Whether credit for any foreign tax has been claimed which is under dispute
i) Whether any refund of foreign tax has been claimed in any prior accounting year as a result of carry backward of losses.
(The author is a Chartered Accountant and can be contacted at [email protected] or Mobile: +91-9953199493)