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Draft Rules on Foreign Tax Credit
By Manish Shah Partner Sudit K Parekh & Co.

Indian Companies have faced various issues while claiming Foreign Tax Credit (FTC) and there has been substantial amount of litigation on the issue of claim of FTC in India. The issues under litigation includes issue on allowability of FTC on tax payable under MAT[1], allowability of FTC in case of exempt income in resident country[2]; issue on documentation required from Foreign Country to claim FTC in India[3], etc. In order to reduce litigation and improve ease of doing business in India, the Central Board of Direct Taxes (CBDT) has recently issued draft rules for granting FTC.

The draft rules provide eight clauses in relation to claiming FTC in India. We have summairsed the same below:

  • FTC to be allowed as credit by way of deduction or otherwise in the year in which corresponding income is offered to tax or assessed in India. This is similar to provisions of section 199 of the Income Tax Act where credit for TDS is granted in the year in which corresponding income is assessable.

  • ‘Foreign Tax’ defined to include:
         - 
    Taxes covered under Double Tax Avoidance Agreement for countries having a DTAA with India;
     
     - For others, tax payable under the law in force in that country in the nature of income-tax referred to in clause (iv) of the Explanation to section 91.

  • FTC is available only against the amount of tax, surcharge and cess payable under the Act. It is not allowed in respect of any sum payable by way of interest, fee or penalty.

  • No FTC shall be available in respect of amounts disputed by the taxpayer in any manner.
  • FTC shall be aggregate of amounts of credit computed for each source of income. The credit shall be lower of tax payable under the Act or FTC paid on such income. For converting the foreign tax paid into Indian Currency ,TT Buying Rate as on the date of tax paid/deducted is to be used.
  • FTC shall also be allowed for tax payable under the provisions of Minimum Alternate Tax (MAT)/Alternate Minimum Tax (AMT).
  • Where tax is payable under the provisions of MAT/AMT, the excess of FTC over the tax payable under the normal provisions of the Act shall be ignored while computing the amount of MAT/AMT credit.
  • No FTC shall be allowed unless the following specified documents are furnished :

    Certificate from tax authority of foreign country specifying the nature of income and the amount of tax deducted therefrom or paid by the assessee. However, in case of tax deducted at source, the assessee can furnish a certificate of tax deducted from the person responsible for deduction of tax at source.


    , acknowledgement of tax paid in foreign country and

    a declaration stating that the foreign tax for which credit is claimed is not in dispute are submitted.

The Draft Rules provides clarity on various aspects like

 

  • Allowability of FTC against Tax payable under MAT/AMT provisions.
  • Allowability of FTC against amount of surcharge and cess.
  • Conversion Rates to be applied for calculating FTC.
  • Specified documents for claiming FTC. The specified documentation requirement is onerous and cumbersome as it includes obtaining documents from the tax authority in foreign country. The requirement of obtaining a certificate from the tax authority may be challenging in cases where the Tax authority in respective source country does not have any such procedures for providing tax certificates.   

 

However, in our view following issues have not been addressed:

 

Manner of claiming Tax Credit

The draft rules provide that FTC is to be computed separately for each source of income. It implies that pooling of FTC is not allowed.

It appears that there can be situation where FTC may lapse in cases where a particular source of income is taxed in Foreign Country but the same is exempt in India due to certain beneficial provisions.

For instance in case where any profit linked or investment linked deduction is claimed in India  and taxes on the same income is paid in the foreign country, the FTC would not be available against taxable income from other source.

 

Applicability of Rules on pending disputes:

The Draft Rules provides that FTC cannot be claimed in case tax amount is disputed in any manner. However, no clarity has been provided on availability of tax credit at a later stage on conclusion of the dispute, where the outcome is decided against the tax payer.

 

Further, based on the Draft Rules, it also appears that no FTC would be available even where only some part of the tax payable is in dispute. For instance the dispute is on account of tax rate applied by the tax authorities in Foreign Country (say 20%) as against tax rate claimed by the tax payer at say 10%, no credit would be available even in respect of  tax paid @10% even when the tax payer has offered the entire income to tax. i

FTC on Branch Profit Tax

As per the Indian Tax laws, profits earned by a branch office are taxed in India on a year on year basis whether or not they are repatriated. Typically, Indian Company claims credit of taxes paid in Foreign Country by the Branch in India.

However, in some countries like USA, Canada, France, etc. additional branch profit tax is levied at the time of repatriation or closure. As per the Draft Rules, it appears that no FTC would be available on such taxes.

Validity of the Rules framed

The draft rules are framed pursuant to the powers conferred on the CBDT under section 295(2)(ha) of the Act. The provision reads as under:

“(ha) the procedure for granting of relief or deduction, as the case may be, of any income-tax paid in any country or specified territory outside India, under section 90 or section 90A or section 91, against the income-tax payable under this Act”

On plain reading of the above, it can be inferred that the amendment vide Finance Act, 2015 have conferred the powers to frame only the procedure for claiming FTC. However, based on preliminary analysis of the Draft Rules, it appears that they have not only provided the manner of claiming credit but also the extent to which the credit can be claimed.  Currently, under the Income Tax apparently there is no provision which prescribes how much credit would be available to the resident Indian in respect of the tax paid in the countries with which India has entered into treaty. Thus, the rules seem to be travelling beyond the statutory provisions.

Concluding thoughts

The issuance of Draft Rules for claiming FTC is a welcome step taken by the Indian Government. Further, the Government has invited the comments of the stakeholders and the general public and hopefully the above concerns raised by us would  be addressed when the final rules would be issued.

 


[1] DCIT vs. Subex Technology Ltd [2015](63 taxmann.com 124)(Bangalore – Trib.)

[2] Wipro Ltd vs. DCIT [2015] 62 taxmann.com 26 (Karnataka)

[3] CIT vs. Bank of India [2015] 64 taxmann.com 215 (Bombay)

 

Authors:

Manish Shah - Partner, Sudit K Parekh & Co.

Nishit Parikh, Senior Manager Sudit K Parekh & Co. 

Views expreseed herein are personal.

 

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