Indians working abroad are likely to pay taxes in both countries — where they are employed and back home, where they qualify to be a resident. One of the ways to eliminate such double taxation is by claiming credit for the taxes paid overseas.
To avoid taxing an individual twice the government has entered into double taxation avoidance agreements (DTAA) with some countries. Even if a taxpayer is based in a country with which India has not signed a DTAA, the domestic tax laws do provide relief.
While there have been provisions pertaining to claiming of foreign tax credit (FTC), practically it has been difficult to agree on credit claims with the tax department, as there are no uniform rules. This led to litigation.
To standardise the norms on foreign income, the Central Board of Direct Taxes has recently notified norms (Rule 128) and the documentation required to claim FTC. These provisions came into force from April 1, 2017. They would, therefore, be applicable from the financial year (FY) 2016-17 onwards. They provide guidance on various aspects of claiming FTC in India.
Claiming foreign tax credit
According to the new norms, FTC would be available only on income which is offered/assessed to tax in the return of that particular year. In other words, if the income is offered in two different years, FTC will be allowed in respective years in the proportion of income offered to tax. For example, in case of countries where the tax year is a calendar year (say January 2017 to December 2017), the overseas income in India for such calendar year would be offered to tax in two different financial years. The income earned abroad between January and March and the FTC of taxes paid on such income would be available when filing returns of the financial year (FY) 2016-17 in India. Similarly, the remaining income (earned between April and December) and the FTC corresponding to such income would be available in FY18.
FTC will also be available only on the amount of income tax, surcharge and cess payable, and not against interest, fee or penalty, etc. If an individual has a tax dispute overseas, the tax credit will not be available on the disputed amount. But it would be allowed if the taxpayer provides evidence of the settlement and of discharge of liability and an undertaking that no refund has been claimed for such foreign taxes. Such evidence would have to be furnished within six months from the end of the month in which dispute is finally settled.
The FTC would be restricted to the extent of tax liability determined in India. The credit will be determined by converting the foreign currency at the telegraphic transfer buying rate on the last day of the month preceding the month in which such tax has been paid.
Submit proofs of taxes paid
Over the years, proof of taxes paid in the foreign country was required to be submitted only if the taxpayer’s return is picked up for audit by the income tax authorities. Now, the taxpayer is required to provide documentary evidence on or before furnishing the return of income to claim FTC in his India tax return. It could be a certificate from tax authority or a certificate from a person responsible for deduction of such tax or a certificate by the taxpayer along with the proof of taxes deducted or paid.
An assessee also needs to furnish Form 67, which is a declaration by the taxpayer in respect of the FTC claimed (including income earned outside India and taxes paid there).
More clarity needed
The rules are in the right direction and attempt to bring uniformity in the documentation required for claiming FTC. They also bring consistency and uniformity in the process. However, certain practical issues still need to be addressed.
Due to the difference in tax years of India and other countries, the details of actual overseas income and taxes paid are typically not available at the time of filing returns in India, as the overseas return has not been filed. It’s not clear whether it is possible to file India tax return and submit Form 67 on the basis of estimated foreign income and taxes. Similarly, it’s not mentioned whether the individual can revise Form 67 subsequently, based on the actual income and taxes paid once the foreign tax return is actually filed.
In many countries where the foreign taxes are paid as a whole (on all sources of income) and the break-up of the taxes paid against each source of income (such as dividend, capital gains, rental income etc.) is not available separately, it will be practically difficult to determine the amount of overseas taxes paid and compute foreign tax credit separately for each source of income. The rules also do not provide the mechanism to be followed if the certificate or foreign tax payment document is not in English.
In addition, the tax department has recently notified the Income-tax return forms for FY 2016-17. However, there is no reference to Form 67 in the return forms nor is the Form 67 available online. Hence, at present, there is no clarity on submission of Form 67.
The writer is Partner, Deloitte Haskins and Sells. Senior Manager Niji Arora, Manager Vivek Mistry and Asst Manager Zalak Shah contributed to the article