All About Foreign Tax Credit and its Claim in India

Tax deducted in foreign country? Here are few important points you should notice in advance.

Table of Contents…

1. Why is tax deducted in foreign country and what is foreign tax credit?
2. Why Claim Foreign Tax Credit in India?
3. How to Claim Foreign Tax Credit in India?
4. Relief under Section 90 and 91
5. Challenges while filling up form 67 under income tax act for claiming foreign tax credit.

Why is tax deducted in foreign country and what is foreign tax credit?
Tax is deducted in a foreign country to ensure that individuals and entities pay their appropriate tax liabilities on income earned within that jurisdiction. The reasons for tax deduction in a foreign country can vary, but they generally serve to fund government operations, public services, and infrastructure.

Foreign Tax Credit (FTC) is a mechanism that helps taxpayers alleviate the potential burden of double taxation. When individuals or entities earn income in a foreign country and pay taxes on that income to the foreign government, they may also be liable to pay taxes on the same income in their home country. FTC allows taxpayers to offset or reduce their home country tax liability by claiming a credit for the taxes paid to the foreign government.

The purpose of FTC is to ensure that taxpayers are not unfairly subjected to taxation on the same income by both the foreign country and their home country. By claiming the FTC, taxpayers can avoid the adverse impact of double taxation and promote fairness in the international tax system.

Here’s how the Foreign Tax Credit works:

1. Eligibility: Taxpayers must determine if they are eligible to claim FTC based on the rules and regulations of their home country. Each country may have specific requirements and criteria that taxpayers must meet to be eligible for FTC.
2. Calculation: Taxpayers calculate the FTC amount based on the lower of two calculations:
   • Actual Tax Paid: The amount of tax paid to the foreign country on the foreign-sourced income.
   • Indian Tax Payable: The amount of tax that would have been payable in the home country on the same foreign-sourced income.
   Taxpayers can claim the lower of the two amounts as the FTC available for offsetting against their home country tax liability.
3. Offset: The FTC is used to reduce the taxpayer’s home country tax liability. If the FTC exceeds the home country tax liability, the excess may be carried forward to future years or refunded, depending on the tax laws and regulations of the home country.
4. Documentation: Taxpayers must maintain proper documentation to support their FTC claim, such as foreign tax payment receipts, foreign tax returns, and other relevant documents. These documents serve as evidence of the taxes paid in the foreign country.

Foreign Tax Credit is a mechanism that promotes the elimination or reduction of double taxation, supports international trade and investments, and ensures fairness in the tax treatment of cross-border income. It provides relief to taxpayers who have already paid taxes on foreign-sourced income in a foreign country and prevents them from being taxed on the same income by their home country.

One can claim Foreign Tax Credit (FTC) in India while filing their income tax return to avoid double taxation on foreign-sourced income. The process involves declaring the foreign income and the corresponding foreign taxes paid in the Indian tax return. Here’s why and how one can claim FTC in India:

Why Claim Foreign Tax Credit in India?

1. Avoidance of Double Taxation: Claiming FTC allows taxpayers to offset taxes paid in a foreign country against their Indian tax liability, thereby avoiding double taxation on the same income.
2. Promotion of International Trade and Investments: FTC provisions promote international trade and investments by ensuring that taxpayers are not discouraged from engaging in cross-border transactions due to the fear of being taxed in both countries.

How to Claim Foreign Tax Credit in India?

• Determine Eligibility: Ensure that the foreign taxes paid are eligible for claiming FTC in India. The foreign taxes should be of a nature similar to Indian income tax and should pertain to income that is also subject to Indian tax.
• Collect Supporting Documents: Gather and organize the necessary supporting documents, such as foreign tax returns, certificates of tax residence, tax payment receipts, and any other relevant documentation that validates the payment of foreign taxes.
• Report Foreign Income: Accurately report the foreign income earned during the financial year in the Indian tax return. Provide detailed information about the nature of income, its source, and the foreign tax paid on that income.
• Calculate Foreign Tax Credit: Determine the amount of FTC available based on the lower of the actual foreign tax paid or the Indian tax payable on the same income. Convert the foreign tax paid into Indian rupees using the applicable exchange rates.
• Complete Form 67: Fill out Form 67, a specific form for claiming FTC in India. Provide the required details regarding the foreign income, foreign tax paid, and the FTC amount being claimed. Ensure that the form is filled accurately and completely.
• File the Tax Return: Include the details of FTC claimed in the appropriate sections of the Indian tax return while filing. Ensure that the tax return is filed within the specified due dates and comply with any additional reporting requirements related to FTC.
• Retain Documentation: Maintain proper records of all the supporting documents and copies of the tax returns filed, as they may be required for future reference or in case of any scrutiny or assessment by tax authorities.

Relief under Section 90 and 91
Section 90 and Section 91 of the Income Tax Act, 1961, provide relief to taxpayers in India who have paid taxes on their foreign-sourced income in another country. These sections aim to prevent double taxation, promote fair tax treatment, and facilitate international trade and investments. Here’s an overview of the relief offered under Section 90 and Section 91:

• Section 90: Relief under Double Taxation Avoidance Agreements (DTAA) Section 90 of the Income Tax Act deals with relief from double taxation through bilateral or multilateral tax treaties, commonly known as Double Taxation Avoidance Agreements (DTAA). India has entered into DTAA agreements with several countries to eliminate or reduce the instances of double taxation on income earned in those countries.
  
  Under Section 90, taxpayers can claim relief by either exempting the income from taxation in one country or through the Foreign Tax Credit (FTC) mechanism. The FTC allows taxpayers to claim a credit for taxes paid in the foreign country against their Indian tax liability on the same income, subject to certain conditions.
  
  To avail relief under DTAA, taxpayers must fulfill specific criteria, including:
  
  a. Being a resident of either India or the treaty country. b. Earning income that is taxable in both countries. c. Obtaining the Tax Residency Certificate (TRC) from the foreign country to establish tax residency. d. Complying with the procedures outlined in the relevant DTAA agreement.


• Section 91: Relief in the Absence of DTAA Section 91 of the Income Tax Act provides relief in situations where income is not covered by a DTAA. This section applies when a taxpayer has paid taxes on income earned in a foreign country that does not have a tax treaty with India. In such cases, relief is granted based on the principle of “unilateral relief.”
  
  Under Section 91, taxpayers can claim a deduction from their Indian tax liability for the amount of tax paid in the non-treaty country. However, the deduction is limited to the lower of the actual tax paid in the foreign country or the Indian tax payable on that income.
  
  It’s important to note that to claim relief under Section 91, the taxpayer must meet certain conditions, including:
  
  a. Being a resident of India. b. Earning income from a foreign country without a DTAA with India. c. Providing evidence of tax payment in the foreign country.
  
  Sections 90 and 91 of the Income Tax Act provide relief to taxpayers in India to avoid double taxation on foreign-sourced income. Section 90 allows for relief through DTAA agreements, while Section 91 provides relief in the absence of such agreements. By availing the benefits offered under these sections, taxpayers can ensure that their income is not subject to double taxation, thereby promoting fair tax treatment and facilitating international trade and investments. It is advisable for taxpayers to seek professional advice and adhere to the specific requirements and procedures outlined in these sections to maximize the available relief.

Challenges while filling up form 67 under income tax act for claiming foreign tax credit
What is Form 67

In India, taxpayers seeking to claim Foreign Tax Credit (FTC) must adhere to specific guidelines outlined in Form 67 under the Income Tax Act. This form serves as a crucial document for individuals and businesses aiming to offset taxes paid to foreign governments against their Indian tax liability. However, the process of filling out Form 67 presents several challenges, including complex requirements, documentation hurdles, and technicalities that taxpayers must navigate to ensure accurate and successful FTC claims.

• Understanding and Complying with Form 67
  Form 67 is a comprehensive document that requires a thorough understanding of the Indian Income Tax Act and the associated rules governing FTC. Taxpayers must carefully study the form’s instructions and guidelines to correctly fill out the required fields. Lack of familiarity with the provisions and requirements of Form 67 can lead to errors and potential rejection of the FTC claim. It is essential to seek professional advice or refer to relevant resources to ensure compliance with the form’s intricacies.



• Gathering and Organizing Supporting Documents
  Form 67 necessitates the submission of various supporting documents to establish the eligibility for FTC. Taxpayers must compile and organize these documents meticulously, as they play a crucial role in substantiating the claim. Such documents typically include foreign tax returns, certificates of tax residence, tax payment receipts, and proof of tax withholding, among others. Gathering these documents from multiple jurisdictions can be challenging, and any missing or incomplete documentation may hinder the FTC claim process.
  
  
• Accurate Reporting of Foreign Income and Taxes
  Form 67 requires taxpayers to report their foreign income and the corresponding foreign taxes paid in a specific format. Accurate reporting is crucial to ensure that the FTC claim is properly calculated. Failure to provide precise and detailed information may result in the rejection or reduction of the credit. Taxpayers must be diligent in reporting the correct amounts and ensuring that the foreign income and taxes align with the relevant financial documents and tax returns.



• Currency Conversion and Exchange Rate Determination
  Form 67 requires taxpayers to convert foreign taxes paid into Indian rupees at the applicable exchange rates. The accuracy of this conversion is critical to determining the correct FTC amount. However, exchange rates are subject to fluctuations, and taxpayers must identify reliable sources of exchange rate information to avoid errors. Incorrect conversion rates can lead to miscalculations and potential discrepancies in the FTC claim.



• Compliance with Timelines and Filing Requirements
  The Income Tax Act stipulates specific timelines and filing requirements for claiming FTC using Form 67. Taxpayers must ensure that they adhere to these timelines and submit the form within the prescribed due dates. Late submission or failure to comply with the filing requirements can result in penalties and the denial of the FTC claim. Taxpayers should maintain an organized approach to meet these deadlines and keep track of any updates or changes to the filing requirements.
  
  Filling out Form 67 for claiming Foreign Tax Credit under the Income Tax Act can be a challenging task for taxpayers in India. Understanding and complying with the complex requirements, organizing supporting documents, accurately reporting foreign income and taxes, ensuring correct currency conversion, and meeting filing deadlines are some of the key challenges faced during this process. Seeking professional assistance and staying updated with relevant guidelines can help taxpayers overcome these challenges and successfully claim the FTC they are entitled to under the law.

Challenges Faced in Claiming Foreign Tax Credit in India
Introduction India’s expanding global presence and the rise in cross-border transactions have led to an increase in the number of Indian taxpayers earning income abroad. As these individuals and businesses strive to comply with their tax obligations, claiming the Foreign Tax Credit (FTC) has emerged as a significant challenge. The FTC system allows taxpayers to avoid double taxation by offsetting taxes paid to foreign governments against their Indian tax liability. However, navigating the complexities of FTC regulations and procedures in India presents several hurdles that taxpayers must overcome.

1. Complexities in Determining Eligibility
   One of the foremost challenges in claiming FTC in India is establishing eligibility. The Indian Income Tax Act provides guidelines on qualifying foreign taxes, including the requirement that they should be similar to Indian income tax. However, differences in tax structures, exemptions, and deductions across countries often complicate the determination of comparability. Additionally, taxpayers must ensure that the foreign tax pertains to income that is also subject to Indian tax.



2. Documentation and Reporting
   Accurate documentation and reporting are essential for claiming FTC successfully. Taxpayers are required to provide supporting documents, such as foreign tax returns, tax payment receipts, and certificates of tax residence, to prove the payment of foreign taxes. Gathering and organizing these documents from various jurisdictions can be time-consuming and prone to errors. Furthermore, taxpayers must meticulously report foreign income and taxes paid in their Indian tax returns, adhering to the prescribed format and meeting reporting deadlines.
   
   
3. Currency Conversion and Exchange Rate Fluctuations Another significant challenge in claiming FTC in India arises from currency conversion and exchange rate fluctuations. Taxes paid in foreign currency need to be converted into Indian rupees at the applicable exchange rates. However, exchange rates can fluctuate significantly over time, resulting in variations in the amount of foreign tax credit available. Accurate and timely exchange rate information is crucial for correctly calculating the credit, and taxpayers must be diligent in sourcing reliable exchange rate data.



4. Dispute Resolution and Avoidance of Double Taxation
   Tax disputes and the risk of double taxation are persistent concerns for taxpayers claiming FTC in India. Disagreements may arise between taxpayers and tax authorities regarding the interpretation of tax treaties, applicability of FTC provisions, or the determination of foreign tax credit limits. The resolution of such disputes can be time-consuming and may involve engaging in mutual agreement procedures outlined in tax treaties. To mitigate the risk of double taxation, taxpayers must proactively engage with tax authorities and provide comprehensive information to support their claims.
   
   
5. Compliance with Anti-Avoidance Measures
   India has implemented several anti-avoidance measures, such as General Anti-Avoidance Rules (GAAR) and Controlled Foreign Corporation (CFC) regulations, to prevent tax evasion and profit shifting. These measures impact the claiming of FTC, as taxpayers must demonstrate that foreign taxes paid were not manipulated to exploit preferential tax regimes or structures established solely to reduce tax liabilities. Complying with these measures requires thorough understanding and diligent adherence to the applicable laws and regulations.
   
   Claiming Foreign Tax Credit in India presents numerous challenges, including complexities in determining eligibility, documentation and reporting requirements, currency conversion and exchange rate fluctuations, dispute resolution, and compliance with anti-avoidance measures. Taxpayers need to be well-versed in the intricacies of the Indian tax laws and maintain meticulous records to navigate these challenges successfully. Streamlining the FTC claiming process and providing clearer guidelines could help alleviate these obstacles and ensure a more efficient and effective tax system for international taxpayers in India.

If you have any questions to wish to know more about “All About Foreign Tax Credit and its Claim in India”, kindly Contact us.