Comments on the Draft Rule for giving Foreign Tax Credit

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Customer Care No. 91-11-45562222
Comments on the Draft Rule for giving Foreign Tax
Credit
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• 1. Introduction
• Finance Act 2015, inserted, w.e.f. 01.06.2015,
  clause (ha) in sub-section 2 of Section 295. It
  enables the Board, subject to the control of
  Central Government, by a notification in the
  Gazette of India, to make rules specifying the
  procedure for grant of relief, deduction of any
  Income tax paid in any country or specified
  territory outside India u/s 90, or Section 90A or
  Section 91, against the income-tax payable under
  the Act. Accordingly, the Board has, in
  accordance with the recommendation made by the
  Committee constituted by it, vide LETTER
  F.NO.142/24/2015-TPL, DATED 18-4-2016,
  announced Draft Rules for granting relief or
  deduction under section 90/90A/91 of the
  Income-tax Act, 1961.

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• 2. Salient features of Draft Rule
• The salient features of the Rules are
• i. For the purpose of giving credit, Foreign tax
  means-
• (a) Tax covered in the Double Taxation Avoidance
  Agreement entered into by India with a country in
  terms of Section 90/90A.
• (b) Tax, being in the nature of Income tax
  referred to in clause (iv) of the Explanation to
  section 91, payable under the laws in force in a
  country, with which India does not have Double
  Taxation Avoidance Agreement.
• ii. The Foreign Tax Credit shall be allowed to an
  Indian resident by way deduction or otherwise, in
  the year in which the income corresponding to
  such tax has been offered to tax or assessed to
  tax in India, in the manner and to the extent as
  specified in this rule.
• iii. The Foreign Tax Credit shall be allowed only
  against Income tax, Surcharge and cess payable
  under Income tax Act and not against any interest
  fee or penalty.
• iv. No credit of Foreign Tax shall be allowed if,
  it is disputed in any manner (in the Source
  Country).

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• v. The foreign tax in respect of each source of
  income in a particular Foreign Country or
  specified territory shall be calculated
  separately and aggregated. The credit of such
  aggregate shall be allowed in the following
  manner-
• (a) The credit shall be lower of the tax payable
  on such income under Income tax Act and in the
  Foreign Country/specified territory.
• (b) The amount of foreign tax for which credit
  shall be given will be worked out in Indian
  Currency on the basis of the telegraphic transfer
  buying rate on the date on which such tax has
  been paid or deducted.
• vi. The credit of foreign tax shall be allowed
  against tax payable u/s 115JB or 115JC in the
  same manner as it is allowed against tax payable
  under the normal provisions of the Act.
• vii. Where Foreign Tax Credit has been allowed
  against tax payable u/s 115JB and 115JC and such
  Foreign Tax Credit exceeds the credit available
  against tax payable under normal provisions of
  the Act then, while computing the amount of
  credit u/s 115JAA or 115JD in respect of the
  taxes paid u/s 115JB or 115JC, such excess shall
  be ignored.
• viii. For claiming Foreign Tax Credit following
  documents are required to be furnished by
  assessee
• (a) Certificate from the Tax Authority of Foreign
  Country specifying the nature of income and the
  amount of tax deducted therefrom or paid by the
  assessee.
• (b) In case of tax deducted at source a
  certificate from the person responsible for
  deduction of such tax.
• (c) In case of online payment of foreign tax,
  acknowledgment or bank counter foil or a slip or
  challan.
• (d) A declaration to the effect that amount of
  Foreign Tax in respect of which credit is being
  claimed is not under dispute.

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• 3. Examples explaining Rules
• (i) If aggregate of Foreign tax paid in a country
  is Rs. 1000/-(calculated at the telegraphic
  transfer buying rate on the date on which such
  tax has been paid or deducted)-
• (a) And if, Income tax, surcharge and cess
  payable in India is Rs. 900/- then credit of
  Foreign tax to the extent of Rs. 900/- only will
  be allowed and the rest of Rs. 100/- shall be
  ignored.
• (b) And if, Income tax, surcharge and cess
  payable in India is Rs. 900/- interest payable
  in India is Rs. 200/- then Foreign Tax Credit
  will be allowed to the extent of Rs. 900/- only.
  No credit against interest will be allowed. He
  will have to pay interest of Rs. 200/- in India.
• (c) And if, Income tax, surcharge and cess
  payable in India is Rs. 1100/- and interest
  charge is Rs. 200/- then credit to the extent of
  Rs. 1000/- against tax payable shall be allowed
  and the assessee will have to pay Rs. 100/- as
  tax in India and interest of Rs. 200/-.
• (d) No credit of Foreign Tax shall be allowed
  against fee or penalty.
• (e) If out of Rs. 1000/- of foreign tax an amount
  of Rs. 300/- is a dispute in the Foreign Country
  then, a credit of only Rs. 700/- shall be
  allowed. Accordingly in example (a) and (b)
  assessee will have to pay Rs. 200/-, interest
  (example (b)) in example (c) assessee will have
  to Pay Rs. 400/- interest.

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