Tax alert on Foreign Tax Credit

As per Indian Income Tax Law (IITL) a resident is liable to tax on his global income, this result in double taxation of income earned by resident outside India, to avoid such double taxation, the provision of Foreign Tax Credit (FTC) is provided in IITL.

• The primary objective of the FTC is to relieve taxpayers from double taxation, where the same income is taxed in both India and another country.
• Double taxation occurs when the same income is taxed by both the country where it is earned (the source country) and the taxpayer's home country (the residence country).
• By providing relief from double taxation, the FTC encourages Indian businesses and individuals to engage in cross-border trade and investment activities.
• India follows the ordinary credit method to allow relief for the taxes paid in the source state i.e., foreign country.
• In many Double Taxation Avoidance Agreement (DTAAs) entered by India, the FTC provisions are mentioned in Article 23 of the DTAAs.
• Eligibility criteria and Limit of FTC :
  • Indian residents, including individuals, companies, and other entities, are eligible to claim the FTC for taxes paid on income earned from foreign sources.
  • To claim the FTC, the foreign income must also be taxable in India under the provisions of the Indian Income Tax Act, 1961. Income that is exempt from tax in India cannot be used to claim the FTC.
  • The taxpayer must have paid taxes on the foreign income in the foreign country where it was earned.
  • The FTC allowed is limited to the amount of Indian tax payable on the foreign income. The credit cannot exceed the Indian tax liability on the foreign income, and the taxpayer must calculate the credit based on the lower of the tax paid in the foreign country or the Indian tax payable on the foreign income.
• Documentation:
  • Taxpayers must provide evidence of taxes paid to the foreign tax authority on the income earned from foreign sources. This proof  includes:
    • Tax payment receipts issued by the foreign tax authority.
    • Foreign tax assessment orders or statements showing the amount of tax paid.
    • Certificates of taxes withheld at source, if applicable.
    • Certificate/Statement signed by the tax payer, specifying the nature of income and the amount of tax deducted.
  • Taxpayers are required to file Form 67 along with their tax return to claim the FTC. This form includes details of foreign income, taxes paid abroad, and other relevant information necessary for computing the credit.
• Services provided by MBG:
  • Provide assistance to assess a client's international tax situation, including foreign income, foreign taxes paid, and potential eligibility for claiming the FTC.
  • Analyze tax treaties between India and other countries to identify potential tax treaty benefits available to clients.
  • Calculations to determine the amount of FTC that can be claimed by clients.
  • Filing Form 67 for the claim of foreign tax credit.
  • Filing Income Tax Return of Individual and Company etc.