Foreign Tax Credit

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Foreign Tax Credit

The rules relating to foreign tax credit are contained in Rule 128 of the Income Tax Rules, 1962. Rule 128 has been made effective from 1st April 2017. The present article highlights the meaning of the term foreign tax credit, inclusions and exclusions from the meaning and also the manner of reckoning of the amount of foreign tax credit. In addition, the article also covers a list of documents required for claiming the foreign tax credit and the applicable Form No. 67 preparation and submission.

Foreign Tax Credit – Meaning and Applicability

As per Rule 128 (1) of the Income Tax Rules, 1962, an assessee who is a resident shall be given a credit for an amount of any foreign tax which is paid by the assessee/taxpayer in a country or specified territory outside India. The credit for tax paid abroad shall be available in the form of deduction or otherwise in the year in which the income corresponding to such tax has been assessable to tax in India. As per rule 128 (2) of the Income Tax Rules, 1962, foreign tax means and includes the following:

  1. Tax covered under the agreement with the foreign countries or specified territories outside India for the relief or avoidance of double taxation of income as per Section 90 or Section 90A of the Income Tax Act.
  2. Tax payable under the law in force in the country or specified territory outside India in the nature of income tax referred to in clause (iv) of the first explanation to Section 91 of the Income Tax Act.

Inclusion And Exclusion In Foreign Tax Credit

As per rule 128 of the Income Tax Act, the following are the inclusion and exclusion in foreign tax credit:

  1. Foreign tax credit includes the amount of tax, surcharge and cess payable under the Act.
  2. A foreign tax credit does not include the sum payable by way of interest.
  3. A foreign tax credit does not include any amount of foreign tax or part thereof which is disputed in any manner by the assessee.

Amount of Foreign Tax Credit

The foreign tax credit shall be total of the amounts of credits computed separately for each source of the income arising from a particular country or specified territory outside India. The foreign tax credit shall be computed as being the lower of:

(a) Tax payable under the Act on the total amount of foreign income, and

(b) Foreign tax paid the total amount of foreign income.

However, in case the foreign tax paid is more than the amount of tax payable in accordance with the agreement then such excess shall be ignored.

Documents Required for Claiming Foreign Tax Credit

  1. Form No. 67 relating to statement of income derived from a country or specified territory outside India and foreign tax credit.
  2. Certificate or statement, from the tax authority of the foreign country or from the person responsible for deduction of such tax, as the case may be, specifying therein the nature of the income and an amount of tax deducted therefrom or tax paid by the assessee. Even the statement signed by the assessee will be valid if the same is accompanied by an acknowledgement of bank counterfoil or an acknowledgement of online payment or an acknowledgement of challan for payment of tax where the payment has been made by the taxpayer.
  3. Proof of deduction in the case where the tax has been deducted. It should be noted that Form no. 67 with other required documents needs to be furnished on or before the due date of filing of income tax return as required under Section 139 (1) of the Income Tax Act, 1961.

Preparation and Submission of Form No. 67

Vide Notification No. 9 dated 19th September, 2017, the Central Board of Direct Taxes, has provided the prescribed procedure for filing online Form No. 67. The relevant steps to be followed for filing the form are narrated hereasunder –

  1. The assessee is required to log in the e-filing portal using appropriate user id and password
  2. Navigate the path e-file > prepare and submit online forms (other than ITR) > select Form 67
  3. Details to be provided in form no. 67 are:
      • Name of the assessee;
      • Permanent Account Number;
      • Address;
      • Assessment Year for which the foreign tax credit is claimed;
      • Details of income derived from the country or specified territory outside India or Foreign Tax Credit claimed;
      • Whether any refund of the foreign tax has been claimed in any prior accounting year as a result of losses pertaining to developmental activities carried out in a backward area, which have been carried forward into the current assessment year? If yes, then following further details need to be provided –
          1. The accounting year to which such loss relates.
          2. The accounting year in which set off of carry backward of loss has been undertaken.
          3. The refund claim for the accounting year.
      • Whether an allowance under the Act for any foreign tax has been claimed which is under dispute? If yes, then following further details need to be provided –
          1. The nature and amount of income in respect of which tax is disputed.
          2. The amount of such disputed tax.
          3. Form no. 67 can be submitted using the Digital Signature Certificate or Electronic Verification Code.

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