I-T dept proposes to simplify foreign tax credit norms

Indian companies paying tax abroad will be able to claim credit and avoid double taxation

The government on Monday released draft rules allowing companies to claim credit for taxes paid abroad. The Central Board of Direct Taxes (CBDT) has said that tax credit will be available to entities paying taxes in any country, including those with which India has Double Taxation Avoidance Agreement (DTAA).

At present, such a facility is not available under the Income Tax Act.

“The credit for foreign tax shall be available against the amount of tax, surcharge and cess payable under the Act, but not in respect of any sum payable by way of interest, fee or penalty,” says the draft of the simplified Foreign Tax Credit (FTC) rules. CBDT will accept stakeholders’ comments on the proposed norms till May 2.

At the moment, many Indian companies with foreign income end up paying taxes in both the countries for the same income and face difficulties to avail credit for such double taxation.

The introduction of such rules was one of the key recommendations of the Tax Administration Reform Commission. The Commission, chaired by Parthasarathi Shome, former adviser to the finance minister, had recommended the government should also come out with clear FTC guidelines, which should also cover the time differences between different tax jurisdictions.

The tax credit, CBDT said, would be the “aggregate of the amounts of credit computed separately for each source of income arising from a particular country or specified territory”.  The draft norms, however, said that no credit would be available in respect of any amount of foreign tax, which is disputed in any manner by the assessee.

“The absence of FTC rules was making it difficult for taxpayers and tax authorities to agree on credit claims and led to uncertainty as well as litigation. The FTC rules will provide the much-needed clarity and guidance on the issue,” said Rakesh Nangia, managing partner, Nangia & Co.

IN THE WORKS

• Tax credit will be available to entities paying taxes in any country, including those with which India has Double Taxation Avoidance Agreement
• At the moment, many Indian firms with foreign income end up paying taxes in both the countries for the same income and face difficulties to avail credit for such double taxation
• The draft norms, however, said that no credit would be available in respect of any amount of foreign tax, which is disputed in any manner by the assessee

The draft seeks to clarify the nature and conditions for the availability of FTC to Indian taxpayers. Cess and surcharges, in addition to tax, will also be creditable. FTC will be available against minimum alternate tax (MAT) liability, too, said Sudhir Kapadia, national tax leader at EY India.  Riaz Thingna, director, Grant Thornton Advisory, said: “It is now specified that foreign tax credit shall also be available against MAT payable and this provides a much-needed clarity.”

Companies claiming tax credit will have to submit proof of tax paid. These would include certificate from the tax authority or a tax deducted at source certificate, online acknowledgment of foreign tax payment and a declaration that the amount being claimed is not under any dispute.

“Clarity on provisions relating to FTC shall provide the promised relief from double taxation agreed by way of Double Taxation Avoidance Agreements. Time to time clarification, announcement and notifications from CBDT providing tax clarity and tax simplicity are taking India to the next level of a tax simplified and non-adversarial tax regime,” said Nangia.