This story is from July 1, 2016

Claiming credit in India for taxes paid overseas becomes easier

Claiming credit in India for taxes paid overseas becomes easier
MUMBAI: In a bid to reduce litigation, the Central Board of Direct Taxes (CBDT) has made it easier for Indian-resident taxpayers, including large Indian companies having overseas operations, to claim credit for the taxes borne by them abroad.
Credit of foreign taxes (referred to as foreign tax credit, or FTC) was allowed under tax treaties with other countries and the Income Tax Act, but the absence of 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 rules issued by the CBDT provide that credit for foreign taxes can be claimed against taxes paid in India, like income tax (be it personal or corporate), cess and surcharge. Further, Indian companies can also claim FTC against Minimum Alternate Tax (MAT). Taxpayers have to submit proof of the tax paid or deducted at source in the foreign country to claim FTC.
The earlier draft rules, issued in April, had excluded disputed foreign taxes from the ambit of FTC. Now credit can be claimed in respect of disputed foreign taxes, subject to meeting compliance requirements.
Indian-resident taxpayers pay taxes on their global income in India, including on foreign source income which has already been subject to tax overseas (see graphic). FTC eliminates double taxation on the same income. To illustrate: A parent company headquartered in India earns interest on debt given to its Sri Lankan (SL) 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 make it easier for it to claim an FTC for the 10% tax withheld in Sri Lanka.

According to RBI data, India Inc’s overseas investments by way of debt and equity amounted to $750 million in May. FTC rules will help Indian companies with global operations get benefit of credits for foreign taxes. The rules will also help high net worth individuals who make overseas investments and bear foreign taxes on their dividend or interest income. “Clarity on grant of FTC against the MAT liability is a big positive as is the move to provide credit for ‘disputed foreign taxes’ upon final settlement of dispute. However, the modus operandi for allowing such credit — especially when the assessments are time-barred — needs to be prescribed,” says Girish Vanvari, tax leader at KPMG India.
Some hiccups remain. Gautam Nayak, tax partner, CNK & Associates, says, “The rules provide clarity about the extent of FTC available and documents to be submitted for that purpose. However, the difficulties faced by certain taxpayers have not been addressed. FTC would not be available for taxes not covered by the relevant tax treaty, such as state taxes paid in the US or branch profits’ taxes paid overseas. Besides, the tax credit would be restricted to 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 would be available only to the extent of applicable rate prescribed under the tax treaty.”
The computation of foreign tax credit is to be done separately for each source of income in each overseas country where such tax has been paid or deducted at source. FTC is limited to the lower of the Indian tax or the foreign tax, paid on such income. The credit is to be determined by conversion of the relevant foreign currency at the telegraphic transfer buying rate on the last day of the month immediately preceding the month in which the foreign tax was paid or deducted.
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About the Author
Lubna Kably

Lubna Kably is a senior editor, who focuses on various policies and legislation. In particular, she writes extensively on immigration and tax policies. The Indian diaspora is the largest in the world; through her articles she demystifies the immigration-policy related developments in select countries for outbound students, job aspirants and employees. She also analyses the impact of Income-tax and GST related developments for individuals and business entities.

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