Claim Foreign Tax Credit Under DTAA (form 67)

INTRODUCTION

• DTAA is the most important aspect for a Non-Resident Indian. Taxation becomes more complicated where the assessee is earning in more than one country.
• Generally, in the case of a Non-Resident Indian, earning income in India as well as abroad, are required to pay the income tax in India and abroad both at the same time, since different countries have different tax regulations. Such a scenario creates the problem of double taxation for NRIs.
• a Non-Resident Indian’s earn income from various sources in India like rental income, interest on FD or NRE/NRO savings accounts, and most commonly capital gain on sale of assets, etc.
• However, under DTAA, an NRI can get the benefit of taxes paid in India and thereby can relieve himself from paying taxes.

TAX CREDIT UNDER DTAA

• With the amount of opportunity available abroad, it is very unlikely that a person, who went abroad to do work in other countries, will return to India in the near future.
• Thus, such persons are seen in a dilemma on the taxation aspect. Whether their income earned outside India be taxed in India again as being residents of India, or not? To avoid such instances, countries sign a mutual agreement in the form of DTAA (Double Tax Avoidance Agreement) which allows them to get relief of tax paid in other countries.

METHODS

• There are two ways/methods, by which an NRI can avail the benefit under DTAA –

A. BILATERAL RELIEF – Under this, there exists an agreement between two countries, where the relief is calculated according to mutual agreement between such two countries. Bilateral relief include two methods –

• EXEMPTION METHOD – Under this method, the doubly taxable income is taxed in only one country. Thus, the amount of tax in one country can be used as tax relief in another country.
• It is to be noted that the income is not at all considered for the purpose of tax calculation while calculating the tax on the rest of the income. Also, the income from the source country is though exempted from tax in the country of residence but the same is considered for tax purposes at the rate determined under DTAA.
• TAX RELIEF METHOD – Under this method, income is taxed in both countries, however, relief is granted in the domestic country of the taxpayer. Such tax relief can be claimed in the country of residence. The same is provided under different methods, namely –
  • FULL CREDIT METHOD – The Resident country grants full credit to the resident taxpayers for the taxes paid in the Source country without any restriction or limits.
• ORDINARY CREDIT METHOD – Under this method, the amount of credit depends upon the tax payable in the resident country.
• In short, the credit is available only if the income is subject to tax in the overseas jurisdiction, and if the tax paid in the overseas jurisdiction is in excess of the tax chargeable in the resident country, the same shall not be available as a credit in the home country. Such a limitation in the limit is provided under different heads as well.

B. UNILATERAL RELIEF – Under this, there does not exist any predefined agreement between the countries, and the relief is provided by the home country.

GOVERNING SECTIONS

• Where the relief is provided under a DTAA agreement with other countries, the resident can avail of tax relief under section 90 of the Income Tax Act, 1961, in India.
• In the case of DTAA with the Specified Associations, the said relief is provided under section 90A. and finally, where there is no DTAA agreement, the residents can claim relief under section 91 of the Act.

COMPUTATION OF RELIEF

SECTION 90

Where any income which is taxable in two countries and they have DTAA agreement, the said procedure be followed for computing the relief –

1. The Compute the total income of the person by aggregating the Indian income and Foreign income.
2. Compute tax on the total income at the rate applicable in India.
3. After this, compute the average rate of tax i.e., Global income divided by the amount of tax.
4. Compute the amount by multiplying Foreign income with such an average rate of tax as determined in step 3.
5. The Compute the amount of tax paid in a Foreign country.
6. The amount of relief shall be the lower of the amount determined in step 4 and step 5.

SECTION 90A

• Where any income which is taxable in two countries and they have DTAA agreement as a specified association, the said procedure be followed for computing the relief –
• Such relief can be claimed only by the residents of the countries who have entered into the agreement.
• In the case of other countries, the residents of such other countries have to obtain a Tax Residence Certificate (TRC) from the government of that country.

SECTION 91

Where any income which is taxable in two countries and they do not have DTAA agreement, the said procedure be followed for computing the relief –

1. Compute the amount of tax payable in India on the total income earned in India and foreign countries.
2. Multiply the rate obtained in step 2, by the doubly taxed income.
3. Compute the lower Indian rate of tax and rate of tax in Foreign countries.

TRC DOCUMENTATION

• The assessee is required to provide a Tax Residency Certificate (TRC) of the country where he/ she is a resident, to claim the relief from double taxation. Thus, TRC is the most important document for an NRI, to avail the benefit under DTAA.
• To claim such benefit, Form 67 needs to be filed by the assessee online, in the year in which the income corresponding to such tax has been assessed to tax in India, and the form be submitted before the filing of respective ITR for that particular period.

CONCEPT OF FOREIGN TAX CREDIT REGULATIONS

What is Foreign Tax Credit (FTC)?

Form 67 Claim Foreign Tax Credit (FTC): A claim deduction for income generated in a source state is known as the FTC. The source state, as the name implies, is where an individual receives income, as opposed to the resident state (the individual’s home nation).

Because the money is obtained in a foreign country, it must be taxed according to the laws of the source country. The same individual will be taxed by the resident state on the basis of worldwide income.

As a result, a taxpayer’s income would be taxed twice: once in the source state and again in the residence state. To avoid double taxation, the residence state permits the payment of taxes in the source state to be deducted from the overall tax burden in the residence state.

• The resident taxpayer can claim the foreign tax credit if the taxes have been paid in the other country.
• Such relief is addressed under Income Tax Act, Sec 90/90A/91 & Rule 128.
• Foreign Tax Credit shall be allowed if, under a DTAA, the foreign income is taxable in India as well as foreign countries. Where DTAA is not applicable, the FTC shall be allowed as per section 91.
• Where the income on which foreign tax has been paid is subject to tax under different years, the respective foreign tax credit will be available in the portion of income proposed to tax.
• Foreign tax credit involves the amount of tax, surcharge and cess paid under the Income Tax Act 1961, but it doesn’t include any amount paid as interest, fee or penalty.
• The foreign tax credit shall be determined as the lower of the Tax Payable under the Income tax act, 1961 and the Foreign Tax Paid on the doubly taxed income.

The below are Few regulations & rules related to Foreign Tax Credit.

• The Foreign Tax Credit is available in the year in which the income subject to this tax was assessed to tax under the Income Tax Act of 1961.
• Foreign Tax Credit can be used to offset the amount of tax, surcharges, and cess due under the Income Tax Act of 1961.
• If there is a disagreement about a foreign tax, the Foreign Tax Credit is not accessible.
• Foreign Tax Credit is applicable on Minimum Alternate Tax (U/s 115JB) taxes.
• The Foreign Tax Credit is made up of total credit amounts estimated separately for each source of income derived from a specific country.
• Foreign Tax Credit is calculated by converting the currency in which the foreign tax was paid or deducted at the Telegraphic Transfer Buying Rate on the last day of the month immediately preceding the month in which the tax was paid or deducted.

What is the purpose of Form 67?

Individual taxpayers who want to claim the Foreign Tax Credit will need to fill out Form 67. It’s necessary to submit Form 67 by the due date for completing your income tax return under Section 139(1) of the Income Tax Act of 1961.

FORM 67: For a person to claim relief of double taxation whether u/s 90/90A/91, CBDT has provided a Form 67, that is compulsorily be filed by the respective assessee online, providing the information in respect of the income during a particular year. The said form must be submitted before such person files their tax returns.

How can we submit a form 67 for a foreign tax credit?

Only online submissions via the e-Filing portal are accepted for Form 67. Select Form 67, fill it out, and submit it after logging into the e-Filing portal. Form 67 Income tax portal 

PROCEDURE FOR FILING FORM 67

The procedure of filing Form 67 is an online-based procedure. At first, the assessee is required to login into the e-filing portal of the Income Tax Department. And shall upload Form 67, duly verified and certified by a Chartered Accountant. The said form be filed before the furnishing of return of income u/s 139(1)

1. For filing Form 67, the CBDT has established a uniform method.
2. Form 67 must be completed and filed online by taxpayers who file their ITR electronically.
3. Log in to the income tax department’s official e-portal using your registered ID and password.
4. Under E-file-Prepare and submit online forms, select the link for filling the form (Other than ITR).
5. Select Form 67 and the assessment year from the drop-down menus.
6. Fill out the form and submit it.
7. A taxpayer’s Digital Signature Certificate (DSC) or Electronic Verification Code will also be required to be submitted (EVC).

Note: Before submitting an income tax return, the taxpayer must complete Form 67.

What are the Documents needed for claiming Foreign Tax Credit

According to Rule 128, a taxpayer is needed to furnish the below documents for claiming Foreign Tax Credit:

Statements

1. Showing the foreign income that is subject to taxation.
2. Using Form No. 67 to show foreign tax deducted or paid on such income.
3. Providing confirmation of tax payments made outside of India.

CERTIFICATES

Showing the nature of the income and the amount of tax deducted or paid by the taxpayer from the foreign country’s tax authority or the person responsible for the deduction of such tax, or signed by the taxpayer.

Form 67 shall furnish the following details pertaining to the respective assessee –

1. Nature of the income earned in a foreign country.
2. The amount of tax that has been paid on such income in a foreign country. The evidence of such tax paid to be provided by the –
3. Authorized tax authority of that foreign country.
4. Any other person is responsible for deducting tax on such income.
5. After completing the said form, the person needs to open the E-file drop down, and select Prepare and submit online Forms.
6. Any other document validating the tax paid and the same be signed by the assessee.
7. Then select Form 67 from the drop-down and follow the instructions to fill the form.
8. Fill in the required details, with the help of the instructions provided.
9. After successful completion, the person needs to authorize the form with the use of a Digital Signature Certificate (DSC) or Electronic Verification Code (EVC), as issued by the Indian authorities.
10. Apart from this form, there are certain other attachments to be uploaded on the portal. These are –
11. A statement containing the information of –
12. The amount of foreign income was disclosed for taxation purposes.
13. Amount of foreign tax deducted or paid on such income.
14. A Certificate or statement specifying the nature of income earned and the amount of tax deducted from it or paid by the taxpayer. The said evidence can be provided by the
15. Any other person is responsible for deducting tax on such income.
16. The authorized tax authority of that foreign country.
17. Any other document validating the tax paid and the same be signed by the assessee.
18. Also, proof of payment of taxes outside India is also required.

IMPORTANT POINTERS

1. Foreign tax credit involves the amount of tax, surcharge, and cess paid under the Income Tax Act 1961, but it doesn’t include any amount paid as interest, fee, or penalty.
2. No FTC is allowed on the amount of foreign tax which is under any dispute on the part of the assessee.
3. The amount of credit shall be determined by applying the conversion rate as prescribed at the SBI TTBR, as on the last day of the month immediately preceding the month in which such tax has been paid or deducted.
4. For example, if the TDS is deducted in the foreign country on 10th January 2021, then the conversion rate shall be the rate of SBI TTBR of foreign currency as of 31^st December 2020.
5. Where any tax is payable under MAT/ AMT, the credit of foreign allowed against such MAT/ AMT shall the as is allowable against tax payable under the normal provisions of the Act.

JUDICIAL PRONOUNCEMENTS

1. The case of WIPRO LIMITED 2015, it was held that, though a taxpayer is exempted from tax due to a limited tax holiday under the ITA, the same shall not lead to denial of a foreign tax credit.
2. In the matter of TATA SONS [2011], it was stated that even though credit was available only in respect of tax paid to Central Government, under DTAA with USA, India decided to extend such credit even to the taxes paid to State as well, and the same be governed under the section 91.
3. The case of VIJAY ELECTRICALS [2015], it was held that tax credit is available even if the same is not deposited with the overseas Government in the year in which the income is taxable. Thus, the application of tax is important, rather than its submission with the government.

Popular blog:-

How to  Claim  Foreign Tax  Credit  Under DTAA

CORPORATE AND PROFESSIONAL UPDATE  may  25, 2017