What is Foreign Tax Credit? And Foreign Tax Credit Rules

Sections 90 and 91 of the Income-tax Act deal with the idea of FTC under India’s tax regulations. Section 90 deals with claiming FTC (Foreign Tax Credit) in situations where India has entered into a Double Taxation Avoidance Agreement (DTAA) with another country and the DTAA allows for such claiming, whereas Section 91 deals with claiming FTC in situations where India has not entered into a DTAA with the country where the taxpayer’s income arises. If a taxpayer is a resident of India and has paid taxes outside of India, he can claim a credit for those foreign taxes paid against his tax payable in India under these sections.

Before understanding the FTC (Foreign Tax Credit), let’s have a quick look at “What is DTAA (Double Taxation Avoidance Agreement)?”

What is DTAA (Double Taxation Avoidance Agreement)?

The DTAA (Double Taxation Avoidance Agreement) is a tax treaty signed by India and another country (or two or more countries) to prevent taxpayers from paying double taxes on income received in both the source and residence countries. Now let’s move toward the FTC.

What is the Foreign Tax Credit (FTC)?

If a taxpayer is a tax resident of India and receives income from another nation, such as the USA, UK, Canada, and so on. On the income received by the taxpayer in that country, the Source State withholds a share of the taxes. Furthermore, the Residence State would tax the individual on his worldwide income, including income from the Source State, according to its tax regulations.

As a result, the taxpayer’s income would be taxed twice: once in the Source State and again in the Residence State. To remedy this, several countries’ tax laws provide a mechanism that permits the Residence State to deduct taxes paid in the Source State from the total tax liability in the Residence State.

Foreign Tax Credit (FTC) is the concept of claiming a deduction or credit for taxes paid in the source state against tax liabilities in the residence state.

Information on Foreign Tax Credit Rules

• FTC shall be available against the amount of tax, surcharge, and cess payable under Indian tax laws, but not against interest, fee, or penalty.
• FTC (Foreign Tax Credit) is the sum of the credit amounts estimated separately for each source of income originating in a specific nation.
• FTC shall be available against the amount of tax, surcharge, and cess payable under Indian tax laws, but not against fee, interest,or penalty.
• If the foreign tax is challenged, the FTC will not be available.
• FTC shall be available in the year in which the income corresponding to such tax has been offered or assessed to tax in India.
• Even tax payable under Section 115JB (Minimum Alternate Tax) is eligible for Foreign Tax Credit.
• The lower of the tax payable on such income under Indian tax legislation and the foreign tax paid shall be the FTC (Foreign Tax Credit).
• The Foreign Tax Credit is calculated by converting the currency in which the foreign tax was paid or deducted at the Telegraphic Transfer Buying Rate on the last day of the month immediately preceding the month in which the tax was paid or deducted.

Required documents for making claims for FTC

In order to claim FTC (Foreign Tax Credit), the taxpayer must file the following documentation on or before the due date of filing the return, as per Rule 128, as follows:

• A declaration of:
  01. Foreign Tax is deducted or paid on income earned from foreign transactions in Form Number 67.
  02. Foreign Income is offered to Tax.
   
• The nature of the income and the amount of tax deducted or paid by the taxpayer are specified in a certificate or statement:
  01. From the foreign country’s tax authority,
  02. From the person in charge of the tax deduction,
  03. Signed by the taxpayer.

An entity needs to provide valid proof that tax payment is done outside of India.

Process for claiming FTC

• Login to the Income Tax E-Filing Portal with your User ID and Password.
• Once the login is completed, Click on e-file from there go to Income Tax Forms and click on File Income Tax Form.
• Select Form 67 from the File Income Tax Forms page. Alternatively, you may search for Form 67 in the search box.
• Select the Assessment Year (AY) and click Continue on the Form 67 page.
• Click on the “Let’s Get Started” button on the Instructions page.
• Form 67 appears when you click Let’s Get Started. Fill in all of the essential information and then click Preview.
• Once e-verification is done click on yes to submit the Form.

A success message appears after successful e-Verification, along with a Transaction ID and Acknowledgement Number. Keep a record of the Transaction ID and Acknowledgement for future use. A confirmation message will also be sent to the email address you provided on the e-Filing portal.