Income from foreign countries receivable by persons residing in India is at times subject to tax in the said foreign country as well. Chapter IX of the Income Tax Act, 1961 provides for relief where any tax is deducted/paid on such foreign income. In a bid to bring certainty and clarity, the Central Board of Direct Taxes (CBDT) has come out with draft rules on how to obtain the said relief.
The key points put forward in the rule are as follows.
1. Credit to be allowed in the year in which income is taxed in India
The Indian revenue authority have proposed to allow the credit for any foreign taxes paid by the assessee in the year in which the said income is taxed in India. Accordingly, irrespective of the fact that when is the tax deducted or paid, credit for such tax will be allowed only in the year in which it is included in the tax return or assessed by the tax officer.
2. Tax credit can be adjusted against tax, surcharge and cess
CBDT has clarified that the tax credit can be adjusted against the income tax payable and also against surcharge and cess on such income tax. The credit can also be used against payment of Minimum alternate tax (under Section 115JB) or Alternate Minimum Tax (under Section 115JC) in a similar manner. However, it has been clarified that foreign tax credit cannot be adjusted against interest, fee or penalty and such payments would have to be made in cash.
3. The credit shall not be available against disputed amounts
The proposed rules have defined foreign tax as the amount paid under the provisions of double taxation avoidance agreements (DTAA) or the amount paid as per the local laws of the foreign country where such DTAAs do not exists. Further, the rate for conversion of tax shall be telegraphic transfer buying rate on the date of payment/deduction of such tax. However, any tax paid which is in dispute in any manner shall not be allowed as credit.
4. Tax credit to be lower of tax payable in India and the foreign tax paid
The proposed rules clarify that the tax credit shall be computed separately for each source of income. Further, the tax credit available to the assessee shall be lower of the tax payable on each income as per the provisions of Income Tax Act and the foreign tax paid on such income.
5. Documents to claim the Foreign Tax Credit
The rules propose that the assessee will need to furnish the following documents to claim the relief of such credit.
- Certificate from the tax authority of the foreign country specifying the nature of income and amount of tax paid by assessee. However, in case of tax deduction at source, certificate from deductor shall also be sufficient.
- Acknowledgement of payment of taxes (popularly known as challan in India)
- Declaration that the tax credit claimed is not in dispute.
While the above rules are definitely a step in the right direction, some of the proposed rules may need a relook. Obtaining a certificate from the tax authority of a foreign country may become too onerous a responsibility for the assessee. Some countries allow for deferred payment of taxes and accordingly, the rules need to specify eligibility of such taxes. Further, clarity is also needed where taxes deposited in dispute become final. We hope that these issues are looked into before the final rules are notified.
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