How to claim credit if you have paid taxes abroad

Non-corporate taxpayers who are gearing up to file their income tax returns for Financial Year 2017-18 need to be aware of the tax credit on taxes paid abroad. Let us understand how it is applied and how to calculate it. 

Concept of foreign tax credit

For Indian resident taxpayers, having cross border operations and earning income from other countries, an important aspect is taxes paid on their income in foreign countries/territories and whether such taxes can be adjusted/deducted while computing tax liability of under Indian income tax provisions. If due care is not taken and prescribed procedures are not followed, on the foreign tax credit, a taxpayer may end up paying income tax twice on the same income. First, in the source country (that is, foreign country, where income is earned) and later in the country of residence (that is, India).

Rules and reporting mechanism 

In order to streamline the process of allowing foreign tax credit claimed by taxpayers and formula to compute the amount of such foreign tax credit, the Government notified Foreign Tax Credit Rules by way of inserting new Rule 128 and Form 67 in the Income tax rules with effect from 01 April 2017. Form 67 is an online form, wherein complete details of foreign sourced income (such as nature of income, country, amount, rate of tax, any dispute regarding such foreign tax etc.) is required to be reported by a taxpayer, before filing its income tax return.  The online form also allows taxpayers to submit copy of documentary evidence (such as copy of foreign tax return, withholding tax certificates, challans, etc.) to substantiate its claim for tax credit, which may be verified by the Income tax department online itself instead of a physical verification. This form needs to be filed online before due date of filing income tax return. The detailed provisions of Rule 128 seek to provide clarity in computation of foreign tax credit amount.

Anomalies

Unlike I-T laws, which allow a taxpayer to revise his ITR or file a late return, there is no provision that allows filing Form 67 late or revising it, in case any correction is required in the amount/other information relating to foreign tax credit. 

Way forward

Taxpayers must take care to file necessary Form 67 on or before due date of filing their income tax returns (viz. generally 31 July for non-corporate tax payers, 30 September/ 30 November for corporate tax payers/ taxpayers subject to tax audit).  They also should attach copy of all necessary documents with the online form, in support of claim for foreign tax credit.  

The writers are with Nangia Advisors LLP