CBDT proposes framework to provide clarity to companies, individuals with foreign income

NEW DELHI: A framework proposed by the Central Board of Direct Taxes for granting relief in lieu of income tax paid outside India will provide clarity to Indian companies or individuals having foreign income. As per the draft foreign tax credit rules put out by the CBDT, credit can be claimed on income tax, surcharge and cess.

Foreign tax credit rules apply in a situation where tax is paid in a foreign country and the same income is subject to tax in India. In such a situation the taxpayer may be able to take credit for tax or claim a deduction for those taxes.

The absence of Foreign Tax Credit (FTC) rules was making it difficult for taxpayers and the tax authorities to agree on credit claims and led to uncertainty as well as litigation. The draft proposes to allow credit to a resident in the year in which corresponding income has been offered to tax or assessed to tax in India. It denies credit for any foreign tax which is disputed in any manner by the taxpayer.
The tax credit will be available to entities paying taxes in any country, including those with which India has Double Taxation Avoidance Agreement. “The credit for foreign tax shall be available against the amount of tax, surcharge and cess payable under the Act but not in respect of any sum payable by way of interest, fee or penalty,” the draft rules say. The CBDT has invited comments from stakeholders on the draft rules by May 2.

The draft rules require taxpayer to furnish certain documents, in the absence of which credit will not be allowed, including certificate from tax authority of country outside India specifying the nature of income and amount of tax deducted or paid by taxpayer, acknowledgment of taxes paid and declaration of amount of tax not under dispute.

“This draft is a well thought out move to clarify the nature and conditions for availability of FTC to Indian taxpayers. Two points are noteworthy, namely, cess and surcharges in addition to tax will also be creditable and FTC will be available against MAT (minimum alternate tax) liability too,” said Sudhir Kapadia, national tax leader at professional services firm EY.

These are draft rules and open to some changes. Rakesh Nangia, managing partner at Nangia & Co had some suggestions on what could be included. “The rules do not make any provisions for carry forward of excess foreign tax paid, neither do they address the issue of branch profits tax paid by branches of Indian companies overseas. The rules also do not address the issue of underlying tax credits in respect of dividend income,” Nangia said. Jiger Saiya, partner-direct tax at BDO India pointed to some difficulties that the assessees could face.

“There could be practical challenges where other countries do not have procedural mechanisms to issue withholding tax certificates. Obtaining certificates from tax authority of foreign country could be another hassle for residents,” he said.