CBDT notifies foreign tax credit rules

To provide respite from double taxation to Indian companies having income abroad, the government on Thursday notified rules allowing companies to claim credit for taxes paid abroad.

The rules, to come into effect from April 1, 2017, will allow taxpayers to claim credit of foreign tax under dispute once it is finally settled.

The rules will allow companies to claim credit for taxes, surcharge and cess paid abroad. Foreign tax credit (FTC) will be available against tax, surcharge and cess, including minimum alternate tax, but not in respect of interest, fee or penalty.

A lot of Indian companies with foreign income end up paying taxes in both countries for the same income, and face difficulties to avail credit for the double taxation.

The introduction of such rules was one of the key recommendations of the Tax Administration Reform Commission. The panel, chaired by former advisor to finance ministry, had also suggested it should also cover the timing differences between different tax jurisdictions.

The tax department also incorporated suggestions of taxpayers on foreign tax credit and relaxed the proposed stringent documentation requirement. Besides, the notified rules also allow claiming of proportionate FTC on the basis of income offered to tax.

In a change from the draft rules, the income tax department has allowed taxpayers to give self-certified statement, giving the nature of income and the amount of foreign tax deducted or paid accompanied with the counterfoil or acknowledgment of taxes paid and/or proof of taxes having been deducted at source, for claiming FTC.

"This process is much simpler than the complex and difficult procedure involving obtaining a certificate from a foreign tax authority," Nangia & Co said. "The CBDT … appears to have taken into consideration the taxpayers suggestions, which is apparent from certain notable inclusion in the Final Rule," said Gupta, partner, Deloitte Haskins & Sells.

The rules provide that disputed foreign tax will be allowed as credit for the year in which the income is taxed in India once the dispute is settled.

To avail of the credit, the taxpayer will have to furnish evidence of settlement of the dispute and evidence of payment of the foreign tax. The taxpayer is also required to provide an undertaking that no refund, directly or indirectly, will be claimed for this foreign tax.

"It may however need to be seen in practice whether the said claim for disputed tax could be allowed without revising the income tax return," said Gupta.

Taxpayers claiming FTC shall now be required to file a Statement of Income from a foreign country with details of tax paid in the prescribed Form 67.

"Rules also provide for situations of carry backward of loss of the current year resulting in refund of foreign tax," said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP.

The rule said that the tax credit, "shall be the aggregate of the amounts of credit computed separately for each source of income arising from a particular country or specified territory outside India".

Riaz Thingna, Director, Grant Thornton Advisory said, "… claim of credit for tax separately for each source of income… could be challenging as each country may have a different nomenclature for the same income, resulting in a loss of credit at times."