13.1 Indian residents earning income abroad on which tax is paid in a foreign country, are eligible for credit for such foreign tax paid. While the DTA and Income-tax Act permit Foreign Tax credit (FTC), there were no rules / procedures. Only basic principles were laid down by the Courts. This resulted in assessees being denied credit in many cases.
The Government came out with rules on FTC vide Notification dated 27.6.2016. These are effective from A.Y. 2017-18. Some of the rules have been incorporated in the ITA by this Finance Bill.
The key provisions of FTC specified in the notification and finance bill are discussed below.
13.2 FTC will be available on that income which is doubly taxed – in India and the foreign country. It is restricted to the Indian tax or the foreign tax whichever is lower. Thus if foreign tax is more than the Indian tax, the excess will not be available.
If the foreign income to be taxed in India is spread over more than one year, FTC will be allowed proportionately over that many years. It will be available against each source of income separately. See Example 1 below.
An Indian resident earns income in UK which is taxed as under:
In India the income is taxable @ 30% irrespective of the source. How much credit will be available? The FTC in India will be as under:
Less: FTC for UK tax
On interest 200 (restricted to actual UK tax)
On Business 300 (restricted to Indian tax)
Net payable in India 100
Excess tax in UK on Business income, cannot be set off against tax on interest in India.
FTC will be available against income-tax, surcharge and cess. It is however not available against interest, fee or penalty. This is a good clarification.
13.3 The FTC will be available in the year in which the foreign income is submitted to tax in India. It will be proportionate to the amount which is taxable in India.
In the US, calendar year is followed for taxation. In India, the tax year is 1st April to 31st March. An Indian resident has earned US income for 2016. In India, the US income for 9 months (1st April to 31st December 2016) and 3 months (1st January to 31st March 2017) has to be submitted to tax.
In what manner will the FTC be available in India?
Tax paid for 2016 in US will be considered proportionately for 9 months. Similarly, tax paid for 3 months of 2017 will be considered proportionately.
However the tax return in India has to be filed by 31st July / 30th September. How does one get credit for US taxes? The final tax for 2017 will be known somewhere by March /April 2018.
In such cases, the tax return in India will have to be filed based on the basis of tax paid in US till the time of filing the Indian tax return. When the final tax amounts are known by March 2018, the return in India will have to be revised. Additional tax will have to be paid or a refund will have to be claimed.
FTC rules provide for some situations where foreign tax amount is not finalised. However it does not take care of all such situations.
13.4 If tax amount is disputed abroad or a refund of tax is claimed, credit will not be available for that amount. In the year in which the dispute is finally settled, credit will be available.
In such situations, the dispute will normally be settled after a few years. The final FTC will be available for the year in which the income has been offered for tax.
Thus in the example in para 13.3, if the resident disputes some tax in the US for 2016 and that dispute is settled and tax is paid in 2020, the FTC will be available in 2020 for the final tax paid – but for the year 2016-17.
13.5 The tax payer is required to submit the following documents:
i) Form No.67 with details of foreign income and tax paid.
ii) Further, Certificate or statement specifying the nature of income and the amount of tax deducted therefrom or paid by the assessee is also required from any of the following:
(a) from the tax authority of the country or specified territory outside India; or
(b) from the person responsible for deduction of such tax; or
(c) by the assessee:
The statement by the assessee should be accompanied by –
(A) an acknowledgment of online payment or bank counter foil or challan for payment of tax where the payment has been made by the assessee;
(B) proof of deduction where the tax has been deducted.
The above documents should be furnished by the due date of filing the tax return.
13.6 The rules clarify that FTC will be available against Minimum Tax payable by companies or other persons. (See paras 21 and 22 for more details about MAT). If there is FTC against MAT, the credit for MAT in subsequent years is reduced. This is a simple computation. However the language in the rules is complicated (Rule 128(7)). Hence we have explained the same with an illustration.
An Indian company has a taxable income of Rs. 100. Book profit as per MAT provisions amounts to Rs. 190. The amount of tax paid in foreign countries is Rs. 32.
In what manner will FTC be available against tax payable in India?
Rate of tax
Normal provisions (1)
As per MAT (2)
Tax to be paid
(Higher of 1 or 2)
Normal MAT credit for subsequent years - - - - - - - - - -
- - -
- - - - - - - -
Tax to be paid
MAT to be carried forward to subsequent years
Thus to the extent MAT is actually paid less, no credit for the excess MAT will be available.
13.7 In some countries, the losses can be carried backwards. For example, in year 1, an Indian company has earned income in Australia. Tax has been paid – say 1,000. This has been set off against tax in India.
13.7.1 In year 4, there is a loss in Australia. In India, such a loss can be carried forward and set off against future income. However let us assume that in Australia, the loss can be carried backward. Thus the loss of year 4, can be set off against income of year 1. Tax will be refunded – say 250. Net tax paid in Australia for year 1 will be 750. Whereas in India, credit for 1,000 would have been claimed. Thus in India, it results in excess credit to the extent of 250 for year 1.
13.7.2 The rules provide that in such cases, Form 67 should provide such details. However in which year should the Indian company pay this additional tax, has not been specified. Will the tax have to be paid in year 1 or year 4? Logically it should be year 1. It will however mean that an old return will have to be revised. Further interest on the same will have to be paid. This will become unfair as the Indian company has not enjoyed the excess credit of 250. It was paid to Australian Government. Now it will be paid to Indian Government. Practically it may be provided that the tax in such cases should be paid in the year in which the refund is received by the Indian company from the foreign Government.