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Analysis of draft rules for grant of Foreign Tax Credit

Income Tax - Direct Tax Code - DTC - By: - CA Paras Dawar - Dated:- 21-4-2016 - Computation of Foreign Tax Credit ( FTC ) in case of assessee s with cross border tax payments has been a major hassle for tax professionals. Absence of well-defined set of rules, coupled with few judicial precedents had resulted in diversified practices. The proposed draft rules regarding grant of relief under section 90/90A/91 of the Income Tax Act, 1961 ( Act ) will help provide much needed clarity in an area whic .....

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tax in India. This may create certain complicacies where there is a mismatch in timing of taxation of a particular stream of income in India and foreign country in accordance with their respective tax laws. For example: Income X is chargeable to tax in India in FY 2016-17 and in foreign country in FY 2017-18. Here, since the income is taxable in FY 2017-18 in foreign country, there may be cases where foreign tax is paid by the end of FY 2017-18. Since, draft rule provides for grant of FTC in the .....

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ween India and the foreign country, eligible foreign tax shall be the taxes covered under the respective DTAA. However, where no DTAA has been entered between India and the foreign country, eligible foreign tax shall mean the tax payable under the law in force in that country in the nature of income-tax referred to in clause (iv) of the Explanation to section 91 of the Act. 3. Grant of FTC Assessee would be allowed to claim FTC against the amount of tax, surcharge and cess payable by such assess .....

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as been disputed by the assessee by way of an appeal in the said foreign jurisdiction. However, the said rule requires greater clarification in case of a situation where the dispute in relation to foreign tax is settled by the competent foreign authority and the assessee chooses not to appeal any further. 4. Manner of calculating FTC The draft rule propose that credit of foreign tax shall be the aggregate of the amounts of credit computed separately for each source of income arising from a parti .....

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credit of foreign tax paid allowable from the tax payable in India. For the above purpose, FTC from each and every stream of income arising from each and every foreign country shall be lower of: i. the tax payable under the Act on such each and every stream of income, or ii. the foreign tax paid on such each and every stream of income Further, the credit shall be determined by conversion of the currency of payment of foreign tax at the telegraphic transfer buying rate on the date on which such t .....

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proposing calculation of FTC separately on each stream of income from a foreign country, consider allowing calculation of FTC on combined income (from all streams of income) from the respective foreign country for the purpose of calculation of lower of tax payable in India and the foreign tax paid. 5. FTC where MAT/AMT is payable One of the most welcome proposal in the draft rule is grant of FTC where tax is payable under the provisions of section 115JB or 115JC of the Act. The draft rule provi .....

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paid under section 115JB or section 115JC, as the case may be, such excess shall be ignored. The said provision is clarificatory and will obviate taking claim of excess FTC twice, first, directly upon payment of taxes when being paid under MAT and second, indirectly by means of MAT credit against future tax liabilities. 6. Documents required to be furnished For claiming FTC, assessee shall be required to furnish following documents :- i. Certificate from the tax authority of foreign country spec .....

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