How to claim Credit of Taxes paid in foreign country?
India follows residence-based tax system under which a resident is taxed on his global income while a non-resident is taxed on his income sourced in India, i.e. ‘received’ or ‘accrued’ in India. A non-resident is also eligible for seeking beneficial tax treatment under the Double Taxation Avoidance Agreements (DTAA) entered into by India with other countries.
Who is considered as a resident as per Income Tax Provisions?
A taxpayer would qualify as a resident of India if he satisfies one of the following 2 conditions:
- Stays in India for 182 days or more in a year or
- Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or more in the relevant financial year
A resident will be charged to tax in India on his global income i.e. income earned in India as well as income earned outside India.
If an individual qualifies as a resident, the next step is to determine if he/she is a Resident ordinarily resident (ROR). He will be a ROR if he meets both of the following conditions:
- Has been a resident of India in at least 2 out of 10 years immediately previous years and
- Has stayed in India for at least 730 days in 7 immediately preceding years
Therefore, if any individual fails to satisfy even one of the above conditions, he would be a Resident but not ordinarily resident (RNOR).
Who is considered as a non-resident as per Income Tax Provisions?
An individual satisfying neither of the conditions pertaining to residency as stated above would be a Non-Resident (NR) for the year.
Let us understand the concept of Double Taxation and relief under DTAA before we move ahead:
A resident will be charged to tax in India on his global income i.e. income earned in India as well as income earned outside India. Thus, in case of resident individuals, there may arise a scenario where the same income is taxable in both the countries i.e. in the source country, where income is earned and the resident country, i.e. India, where individual earning such income qualifies as a resident. This may result in double taxation of the same income as per the domestic tax laws of both the countries.
Double taxation is the levy of tax by two or more countries on the same income, asset or financial transaction. This double liability is mitigated in many ways, one of them being a tax treaty between the countries in question. A tax treaty between two or more countries to avoid taxing the same income twice is known as Double Taxation Avoidance Agreement (DTAA).
When a tax-payer resides in one country and earns income in another country, he is covered under DTAA, if those two countries have one in place. Its only focus is to ensure individuals do not end up paying taxes twice. And to enable this, the Foreign Tax Credit system comes into the picture.
If a person who is resident in India in any previous year, in respect of his income, accrued or arose outside India has paid tax on such income in any country outside India, he shall be entitled deduction from the Income Tax payable by him of a sum calculated on such doubly taxed income:
- Under section 90 of the Income Tax Act, if the country in which tax is paid has entered double taxation avoidance agreement with the Government of India.
- Under section 91 of the Income Tax Act, if the country in which tax is paid has not entered into any agreement with the Government of India.
Relief allowed under section 90/ 91 is lower of following accounts:
- Tax paid on double-taxed income outside India.
- Tax payable on double-taxed income under Income Tax Act.
How can one avail Foreign Tax Credit under Income Tax?
In order to claim Foreign Tax Credit, the taxpayer is required to file following documents on or before due date of filing of return:
- A statement of foreign income offered to tax
- A statement of foreign tax deducted or paid on such income in Form No. 67
- Certificate or statement specifying the nature of income and the amount of tax deducted therefrom or paid by the taxpayer:
- From the tax authority of the foreign country
- from the person responsible for the deduction of such tax
- signed by the taxpayer
- Proof of payment of taxes outside India.
What is Form 67?
- Form 67, is an important document that has to be furnished in order to claim Foreign Tax Credit by a taxpayer.
- It is also essential that it be furnished on or before the due date of filing return of income under section 139(1) i.e. the original return of income.
- Taxpayers who plan to file their taxes electronically must submit their Form 67 online as well.
- Once a taxpayer logs in to the income tax portal, they can view the form.
- It is mandatory to submit the EVC or Electronic Verification Code or the Digital Signature Certificate (DSC).
How to file Form 67?
Step 1 – The taxpayer is required to login into the e-filing portal using their valid credentials. A link for filing the form has been provided under “E-file-Prepare and submit online forms (Other than ITR)”
Step 2 – Select Form 67 and the AY from the drop down. Instruction to fill the form is enclosed along with Form 67. The first four sections in the form expect some basic information from you, such as name, address, Pan number and the assessment year. The next section requires a lot of additional information. Here is a list of all the fields that you would have to fill in the form.
- Foreign Country
The name of the country/territory where you were working and have received income of some form.
- Income Source
Your source of income in a foreign country. If you have multiple sources of income, you need to declare all of them. Whether it is salary or income from a rented property, it must be declared.
- Total outside income
You need to mention the total income that you have received outside India or its territory.
- Taxes paid
You need to specify the total amount of taxes that you have paid on foreign income. You need to mention the amount and the conversion rate of the currency as well.
- Taxes paid in India
The tax that you have paid in India for such foreign income.
- Tax credit under Section 90/90A
This section is applicable for income that you earn in countries that India has entered a DTAA with. You would need to mention the treaty, which mandates that the income is taxed. The total amount that is taxed as per DTAA
- Total foreign tax credits
Once you will all the above details, the website will calculate the minimum credit amount.
Step 3 – You can submit the completed form 67 by clicking on the ‘submit’ button. You can also save the form filled as a draft so that you can make some changes later and then submit it.
While the mechanism to claim Foreign Tax Credit appears straight forward, there are certain practical difficulties which a taxpayer may face. One such instance is where the tax years are different in the home country and the source country.
For example, India’s financial year is from 1 April to 31 March, whereas US and many other countries adopt calendar year as fiscal year. The Indian tax return is generally required to be filed by 31st July, 2020 (for FY 19-20) and can be revised only till 31st March, 2021. However, the US tax return for 2020 may not be filed by 31 March 2021. As a result, it would be practically difficult to furnish evidence in respect of the foreign income earned during the period 1 January 2020 to 31 March 2020 and calculate foreign tax credit thereon in the absence of a corresponding US tax return. Also, Indian domestic tax laws do not provide a mechanism for a taxpayer to carry back or carry forward excess unutilized foreign tax credit.
It is important for tax residents in India who have foreign source income to carefully analyse such income and collate the necessary documents related to the tax withheld on foreign income. While the law relating to foreign tax credit has evolved over a period of time and it has become much simpler to claim the credit today, it is also hoped that the government takes note of the practical difficulties and address the same in near future.