19 April 2016

Foreign Tax Credit

Deductions allowed for tax paid in foreign nations

To improve ease of doing business and reduce litigation, the Central Board of Direct Taxes (CBDT) on Monday issued draft rules that would allow resident tax payers to claim deduction or credit for taxes paid in foreign jurisdictions.

The draft rules have proposed that the foreign tax credit would applicable on income tax, surcharge and cesses as well as against tax payable under minimum alternate tax.

But, the credit will not be provided for other sums such as interest, fee or penalty or taxes under dispute.

The rules, once finalised will allow for foreign tax credit with all countries with which India has a double tax avoidance agreement as well as tax paid by Indian residents in other specified countries.

At present, such a facility is not available in the Income Tax Act, 1961 and the introduction of such rules was one of the key recommendations of the Tax Administration Reform Commission.

"A committee was set up by CBDT to suggest the methodology for grant of foreign tax credit after examining the various issues related to it. After due consideration of the issues raised by various stakeholders, the Committee submitted its report," said the CBDT, adding that all comments should be submitted by May 2.

The draft rules have also proposed that the credit will be available to the resident assessee in the year in which the income has been taxed or assessed in India.

Further, the credit will be calculated separately for each source of income and from each country. The amount of credit available will be lower of the tax payable under the Income Tax Act on such income and the foreign tax already paid and will be calculated based on the conversion rate on the day the foreign tax was paid.

Taxpayers will also have to furnish documentary evidence for availing the credit including a certificate for the tax department of the foreign company, acknowledgement of online tax payment or bank counter foil and a declaration that the amount is not under any dispute.

Expert view

While welcoming the draft rules, analysts, however, said that they should have included other sums such as interest and penalty paid in a foreign country.

"They do not make any provisions for carry forward of excess foreign tax paid, neither do they address the issue of branch profits tax nor that of underlying tax credits for dividend income," said Rahul Jain, Partner, Nangia & Co.

To simplify the system, experts also suggested that taxpayers should be permitted to accumulate foreign tax credit from various countries and claim it together rather than individually for each source and country.

"Two points are noteworthy, namely, cess and surcharges in addition to tax will also be creditable and it will be available against MAT liability too," said Sudhir Kapadia, National Tax Leader, EY India.

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