What is Foreign Tax Credit?
If we have earned income from any other country, some tax must have been paid or deducted by the payer as per the provisions of that country. A resident individual of India is taxed in India for the income earned globally. It also includes the income we have earned outside India. It leads to double taxation of such income earned abroad. To avoid such double taxation, the concept of foreign tax credit comes into the picture. The taxes that we pay in foreign country is allowed as credit either in full or in part against the total tax payable by a resident individual. The amount that will be given as credit will depend on the DTAA.
What is DTAA?
DTAA stands for Double Tax Avoidance Agreement. Government of India has entered into an agreement with some countries to decide mutually the rate of credit to be given for paying Tax in that particular country known as DTAA.
Provisions in Income Tax Act
The provisions regarding Foreign Tax Credit are dealt by Section 90 and 91 of the Income Tax Act, 1961 further read with rule 128.
Provisions explained
Section 90 deals with claim of Foreign Tax Credit where India has entered into DTAA. As per this section, where the Central Government has entered into an agreement with the Government of any country outside India for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. For example, if a particular income is taxable in other country but exempt in India, then such income shall be taken as exempt as it will be more beneficial to the assessee.
Section 91 deals where there is no DTAA. Under this section, a rebate of tax on foreign income calculated at a rate which shall be lower of rate at which taxes are paid in Foreign Country or average rate of Tax in India. Lets understand this with the help of an example.
Suppose Mr. A has an income of Rs. 1,00,000 in Country X on which tax deducted is Rs.10,000. He also have an income of Rs. 5,00,000 in India. Now his total income taxable in India would be Rs. 6,00,000. Tax on same amounts to Rs. 32,500 (excluding cess). Therefore average rate of Tax in India is 32500/600000*100 being 5.42%. Further the rate of tax at which tax is paid in Country X is 10000/100000 being 10%. Thus he will be allowed a rebate @ 5.42% (being lower of 5.42% and 10%) on this doubly taxed income. Thus total rebate provided is Rs. 5,420/- being Rs.1,00,000.
How to claim Foreign Tax Credit?
One of the foremost condition to claim foreign tax credit is that the foreign income must be offered to tax in India. Further following documents needs to be furnished:
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Form No. 67
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Certificate or statement either from the tax authority of foreign country or person responsible for deducting tax specifying the nature of income and amount of tax deducted or paid
All About Form 67
It is statement showing the details of income earned in foreign country along with tax deducted or paid thereon. It is to be furnished in following two cases:
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In order to claim foreign tax credit in current year
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where the carry backward of loss of the current year results in refund of foreign tax for which credit has been claimed in any earlier previous year or years
Details to be filled in Form 67:
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Basic details like Name, PAN, Address and Assessment Year
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Details of doubly taxed income and taxes paid thereon
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Details in case of carry backward of losses
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Details in case of disputed foreign tax credit
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Verification page
Some important points:
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Form 67 is to be filed electronically.
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It is to be filed on or before due date of filing Income Tax Return.
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It is available on the e-filing portal itself.
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Electronic Verification Code (EVC) or a Digital Signature Certificate (DSC) is required to file
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It should be submitted before filing of Income Tax Return
To view format of form 67, refer https://www.incometaxindia.gov.in/forms/income-tax rules/itr62form67.pdf