Double Taxation Avoidance Agreement (DTAA) is entered between two countries to avoid double taxation, i.e., same income is being taxed in both countries, maintaining mutual economic relations, trade and investments. DTAA are entered in accordance with power granted under Section 90 and 90A of Income tax Act.
As per Section 90 and 90A of Income Tax Act, A non-resident Indian can avoid taxability liability in India on income generated in India by furnishing a Form 10F and Tax Residency Certificate from another country. But what about if a Resident Indian pays Income Tax in another country and is liable to pay income tax on that income in India as well?
In such a situation, a resident Indian is entitled to claim credit for tax paid in foreign country while filing his Income tax return in India in accordance with provisions of Section 90, 90A and 91 of Income Tax act read with Rule 128 of Income Tax Rules. This article contains a detailed discussion of how to claim Foreign Tax Credit while filing ITR.
1. What is Foreign Tax Credit
- Foreign tax Credit is a given when a resident Indian offers the same income to tax in India and as well as another country.
- In that case, he is entitled to claim credit of Income tax paid in another country from his Income tax liability arising in India subject to certain compliances.
- An Assessee is an Indian Resident and has provided his services to the Singapore Client.
- While remitting funds, The Singapore client deducted TDS on his remittance even though such person is not liable to file ITR in Singapore.
- However, such a person is liable to pay Income Tax on such income in India.
- Therefore, as per DTAA between India and Singapore, Such person shall be entitled to claim deduction of tax withholding deducted in Singapore from his Income Tax liability arising in India subject to conditions given under Income Tax Act.
2. Foreign Tax Credit (“FTC”) under Income Tax Act
- Provisions related to FTC are given under Section 90, 90A and 91 of Income Tax Act read with Rule 128 of Income Tax Rules.
- FTC is claimed under Section 90 where India has entered in to a DTAA with another country. However, FTC for other countries is claimed under Section 91.
- Relief is provided in following 2 manners:
- Relief to Non-residents:
- Non-residents, who are not entitled to pay Income Tax in India can get their income without deduction of any withholding tax in India.
- However, for this purpose a non-resident is required to file Form 10F in India alongwith a Tax residency Certificate.
- Relief to Residents:
- As per Rule 128 of Income Tax Rules, A resident shall be allowed a credit for the amount of any foreign tax paid by him in a country outside India.
- However, for this purpose, Assessee is required to furnish Form 67 alongwith specified certificates and statements.
3. Conditions of Claiming FTC
An Assessee is entitled to claim benefit of FTC subject to fulfillment of following conditions:
- Credit shall be allowed in the year in which Income, on which withholding tax is deducted or tax has been paid in another country, is offered to tax in India.
- However, In case, income is offered to tax in multiple year then credit shall also be allowed across all years on proportionate basis.
- Foreign Tax shall means:
- Countries with which India has entered into a DTAA, tax covered under the agreement;
- With respect to other countries, the tax payable under the law in force in that country
- Such credit can be used against Tax, Surcharges and cess payable under Income Tax Act. No credit shall be allowed against interest, Fee or penalties.
- No Credit shall be allowed for tax under dispute unless assessee furnishes an evidence of settlement of dispute and an evidence that the liability for payment of such foreign tax has been discharged by him.
- FTC shall be allowed for lower of the following amount:
- Tax Payable under Income Tax Act on such foreign income; or
- Foreign tax paid on such foreign income
- In case, Foreign tax paid is in excess of Income Tax payable in India on such income then such excess Foreign Tax shall be ignored and shall not be carried forward to next Assessment year.
- Credit of Foreign Tax shall be allowed on furnishing of following documents:
- Statement of Income earned outside India on which foreign tax is deducted or paid in Form 67;
- A Statement or certificate specifying the nature of Income and amount of tax deducted or paid from:
- Tax Authority of such country; or
- Person responsible for deduction of TDS
- However, if no certificate or statement is available from Tax authority or transferor, Assessee can furnish a self signed statement or certificate. However, same is required to be accompanied with:
- In case of tax payment, an acknowledgement of online payment or bank counterfoil or challan for payment of tax;
- In case of tax deduction, proof of deduction where the tax has been deducted.
4. Information to be furnished in Form 67
Assessee is required to furnish following information in Form 67:
- Name, Address and Permanent Accounting Number;
- Head-wise following details of income from a country or specified territory outside India and Foreign Tax Credit claimed:
- Name of the Country/Specified Territory;
- Source of Income, i.e., Salary, House Property, Business/Professional Income, capital Gains, Interest, Dividend, etc.
- Income from Outside India;
- Rate and amount of Tax paid outside India;
- Tax payable on such income under normal provisions in India
- Tax payable on such income under section 115JB/JC
- Credit claimed under section 90/90A
- Article No. of Double Taxation Avoidance Agreements
- Rate of Double Taxation Avoidance Agreements Rate of tax as per Double Taxation Avoidance Agreements
- Credit claimed under section 91 Amount
- Total foreign tax credit claimed
- Whether any refund of foreign tax has been claimed in any prior accounting year as a result of carry backward of losses Yes/No
- In case of affirmative answer, following details are to be furnished:
- the accounting year to which such loss pertains
- the accounting year(s) in which set off of carry backward of loss has been undertaken
- refund claimed for the accounting year
- previous year to which refund referred to in (iii) relates
- Whether credit for any foreign tax has been claimed which is under dispute: Yes/No
- In case of yes, Following information is to be furnished:
- the nature and amount of disputed income;
- Amount of disputed tax
5. Due date of filing for Form 67
- Form 67 alongwith certificate or statement shall be furnished by end of relevant assessment year provided that the return for such assessment year is furnished by 31st December of the relevant Assessment year.
- However, if assessee is filing ITR-U, i.e., updated return, then Form 67 alongwith the certificate or the statement shall be furnished before the date of filing of such return.
6. Procedure of filing of Form 67
- Form 67 can be filed online on Income tax portal .
- Assessee is required to login at Income tax efiling portal with his user ID and password.
- Post login, Forn 67 shall be available at following path:
e-file > Income Tax Forms > File Income tax forms > “Others (sources of Income not relevant) > Miscellaneous Form 67
- Form 67 can be filed with the DSC of the Assessee or through electronic verification code.