AN COMPREHENSIVE GUIDE ON FOREIGN TAX CREDIT

Following are something which is not allowed as foreign tax credit: Any sum paid as interest, fee or penalties; but includes any tax on income or business profit imposed by federal, state or municipal level. Any among of foreign tax which is disputed. However, credit of the disputed amount shall be allowed for the year in which such income is offered to tax in India if the tax payer within 6 months from the end of the month in which dispute is finally settled, furnishes evidence of settlement and an evidence to the effect that the liability of the payment of such foreign tax has been discharged and furnishes undertaking that no refund in respect of such amount has directly or indirectly has been claimed or shall be claimed.

In the case of Wipro Ltd v Dy. CIT 383 ITR 179 (Kar.), If the case is covered under section-90(1)(a)(ii)  of ITA, the taxpayer would be entitled to take credit of Income tax paid in foreign Country even in relation to the income which is exempted under section-10A.

As per the scheme of tax credits, based on the domestic law, the international tax literature band Model convention commentaries, there is no situation in which excess foreign tax credit can result in a situation in which taxpayers can get refunds, from the exchequer of residence jurisdictions, in respect of taxes paid to the exchequer of source jurisdiction. Proviso of sub rule 5 of Rule 128 of Income tax rules, 1962 specified that where the foreign tax paid exceeds the amount of tax payable in accordance with the provisions of DTAAs, such excess credit shall be ignored leaving no room for any Carry forward or refund of excess credit of foreign tax but prospectively from 1.4.2017 the effective date of application of the rules.

S-40(a)(ii) of ITA provides that any sum paid on Account of any rate or tax levied on the profits or gains of any business and profession is not allowed. Section-2(43) defines ‘tax’. So any sum covered as tax shall not be allowed as deduction of business expenditure.

No.

Tax sparing credit is granting a tax credit in the resident state for the amount of tax that would have been payable in the source state had there been no reduction or exemption under the tax regime of source state.  In many Countries, incentives are given to overseas taxpayers by way of tax holiday, by the virtue of which no or less tax is payable in those countries. As most of the DTAAs, India’s position is to allow tax credit only when taxes are actually paid in those jurisdictions.  Therefore, India does not promote tax sparing credit while many countries of the World extending this benefit to their tax residents.

The underlining tax credit refers to the credit that may be given, in the Resident state, for the taxes paid on the underlying profits out of which dividend is paid by a company in the source state. This is usually applicable only to Companies and is a case of economic double taxation. Of the income. It is not covered under the definition of tax as per Section-2(43) of ITA. There is no specific Provision under Indian tax laws to provide credit of underlining tax. However, there are some DTAAs which provides credit of underlining tax e.g. India-Mauritius, India-USA etc.

Following are the methods of Credit of Foreign Tax: 1) Exemption Method adopts ‘income approach’ i.e. exclusive right of tax is given to any one of jurisdictions, residence or source, for each head of income are of two type, Full Exemption and Exemption with progression wherein EXEMPT income is included only for rate purposes. 2) Credit Method: adopts ‘tax approach’ meaning country of residence allowed tax credit for foreign tax paid are of two type. 3) Ordinary credit method: The amount of tax which must be credited may not exceed the tax that the Resident would pay in the residence state on the same foreign item of income. 4) Full credit method: The full credit of foreign tax is allowed with the domestic tax on foreign source income and balance of foreign tax shall either be adjusted against other domestic tax or refunded or carry forward.

Credit of the foreign tax shall be allowed on furnishing the following documents by tax payers, namely: 1) A statement of the income from the country or specified territory outside India offered for tax and of foreign tax paid on such income in Form No. 67 duly verified. 2) Certificate or statement specifying the nature of income and the amount of tax deducted therefrom or paid by the tax payer, from a) the tax authorities of the country or specified territory outside India; or b) from the person responsible for deduction of such tax; or c) signed by tax payer along with challan of foreign tax paid or proof of deduction of foreign tax. The statement or certificate as mentioned above must be furnished on or before the due date of furnishing the tax return in India.