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Rules for Grant of Foreign Tax Credit in India

Income Tax - Direct Tax Code - DTC - By: - CA Rohit Gupta - Dated:- 2-9-2016 - Central Board of Direct Taxes (CBDT) has, vide Notification no. 54/2016 dated 27th June 2016, notified Rules for grant of Foreign Tax Credit (FTC). The said rules are applicable from Assessment Year 2017-18 onwards. Earlier, the CBDT had released draft FTC rules on 18th April 2016 for public comments and on the basis of comments received, the final rules are notified. The Rules provide clarity on the mechanism of obta .....

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specific rules often led to litigation. Denial of FTC by tax authorities also resulted in double taxation on the same income in the hands of Indian-resident taxpayers. FTC eliminates double taxation on the same income. To illustrate: A parent company headquartered in India earns interest on debt given to its foreign subsidiary and is subject to a 10% withholding tax. The Indian company will pay tax in India on its global income (including the foreign source interest income). The new rules will m .....

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ax charged by the central or local authority in that country To claim a credit, two requirements envisaged are the foreign tax must have been paid, and credit may be claimed for the year in which the corresponding income is offered to tax in India FTC in respect of financial year mismatch The rules provide that FTC shall be allowed, in respect of the amount of any foreign tax paid outside India, by way of deduction or otherwise in the year in which the income corresponding to such tax has been o .....

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ble across two years, credit shall be proportionately distributed across those years based on when income is offered to tax in India. Foreign Taxes Covered The rules provide that foreign tax credit shall be available in respect of following foreign taxes: In respect of a country with which India has a Double Taxation Avoidance Agreement, the tax covered under such agreement, and In respect of other countries, the tax payable as per the laws of that country in the nature of income tax. Clause (iv .....

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the rate of tax payable under the tax treaty, even if the actual tax paid as well as the Indian tax payable is higher. So, if excess taxes have been withheld by the foreign payer out of abundant precaution, or on account of their local laws, tax credit would be available only for tax payable under the treaty terms. For example, the US levies a higher rate of withholding of 30% if a foreign entity (say, an Indian company) does not have a tax identification number. In such cases, credit in India .....

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xes are substantially similar to income taxes. This reduces the ambiguity amongst taxpayers on the eligible taxes, and should reduce long drawn litigation on this subject. Credit in respect of Disputed Taxes The Rules provide that no credit shall be available for any amount of foreign tax which is disputed in any manner by the taxpayer. Therefore, a tax credit is not applicable in a situation where foreign tax was paid by the taxpayer on demand during scrutiny by the foreign tax authorities, but .....

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aimed or shall be claimed. The move to provide credit for 'disputed foreign taxes' upon final settlement of dispute is a welcome relief. However, the procedure for allowing such credit, especially when the assessments are time-barred needs to be prescribed. Also, depending on the tax administrative efficiency of the concerned foreign jurisdiction, it may take several years for the final dispute to be resolved. This time gap may lead to an undesirable situation where taxes have been doubl .....

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s per DTAA, then such excess shall be ignored while computing the foreign tax credit. FTC shall be determined by converting the foreign currency at the Telegraphic Transfer (TT) Buying rate as on the date of payment/ deduction of such foreign tax. Certain jurisdictions such as Singapore follow a credit pooling system where tax credits are not divided into various heads. This mechanism enables businesses to effectively utilize tax credits and avoid double taxation due to characterization issues. .....

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nst the tax payable under the normal provisions, then such excess shall be ignored while computing the amount of MAT credit available under section 115JAA or 115JC of the Act. However, the Rules are unclear on how the computation mechanism would work in such a case, as there may be a mismatch in the source of income tax - between MAT and taxes paid in the foreign country. How to Claim Foreign Tax Credit-Documents Required Taxpayers will have to furnish the following documentary evidence for avai .....

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