Timeline to Claim Foreign Tax Credit Extended - Major Relief against Double Taxation

The Central Board of Direct Taxes has recently come up with a significant amendment in Rule 128 of the Income-tax Rules, 1962, providing major relief to taxpayers in claiming Foreign Tax Credit (FTC). The pre-amended rule required taxpayers to file their FTC claims in Form No. 67 by the due date of furnishing their Income-tax returns. However, as per the recent notification issued by the government, the time limit to file Form No. 67 has been extended. The statement for claiming FTC in Form No. 67 can now be filed on or before the end of the relevant Assessment Year. Before diving further into the details of the amendment and the implications thereof, let us first quickly understand what foreign tax credit is all about, what purpose it serves and how to claim it.

Concept of Double Taxation

Assume a case where a taxpayer is a resident of India and is in receipt of income from Canada. The Source State (Canada in this case) withholds a portion of taxes on the income received by the taxpayer in that country. Further, according to the Indian Income-tax law, India (the Residence State) would tax the taxpayer on his global income, which would include income from Canada too. It would result in the taxpayer getting taxed on his income twice, i.e., once in the Source State (Canada) and once in the Residence State (India). This is precisely the concept of double taxation, wherein the same income is taxed twice in two countries.

Concept of Foreign Tax Credit

To address the above-discussed issue of double taxation, the tax laws in various countries provide a mechanism whereby the resident country allows a deduction of taxes paid in the foreign country from where the income has been earned (Source State) from the total tax liability in the Residence State. The credit claimed for taxes paid in Source State against tax liability in Residence State is called Foreign Tax Credit (FTC).

In India, sections 90, 90A and 91 of the Income-tax Act deal with the concept of FTC. Sections 90 and 90A discuss claiming of FTC where India has entered into a Double Taxation Avoidance Agreement (DTAA) with another country wherein the eligible amount of FTC is determined as per the relevant DTAA. Where as Section 91 lays down provisions for claiming FTC in scenarios where there does not exist any DTAA between India and the foreign country, wherein the foreign tax means the tax payable as Income-tax under the law in force in the foreign country.Under these sections, if the taxpayer has paid taxes abroad, he can claim a credit for such foreign taxes paid against his taxes payable in India.

Some of the points worth noting about FTC are as follows:

* FTC is allowed in that year in which the income corresponding to such tax has been offered to tax in India;

* FTC is not available in respect of any amount of foreign tax which is disputed in any manner by the assessee;

* FTC can be claimed against the amount of tax, surcharge and cess payable under the Indian Income-tax law but not against interest, fee or penalty;

* FTC shall be the total of the amounts of credit computed separately for each source of income arising from a particular country;

* The credit available shall be the lower of the tax payable under the Indian tax laws on a particular income and the foreign tax paid on such income.

Also Read: Recent Changes in ITR Forms for AY 2022-23

Documents To Be Furnished For Claiming FTC

According to Rule 128, for claiming FTC, the taxpayer is required to furnish the following documents:

1)  A statement of foreign income offered to tax for the previous year and of foreign tax paid or deducted on such income in Form No. 67.

2)  A statement or certificate specifying the nature of income and the amount of tax deducted or paid by the taxpayer:

     a) from the tax authority of the country outside India, or

     b) from the person responsible for deducting such tax, or

     c) signed by the assessee.

3) Proof of payment of taxes in the country outside India.

Form 67

Form 67 is a crucial document that has to be furnished by the assessee to the Income-tax department within the specified timeline to claim Foreign Tax Credit. Form 67 comprises four sections:

1) Part A

Part A of the form entails basic information such as the assessee’s Name, PAN or Aadhaar, Address and Assessment Year. It also seeks the receipt details of the income from the country outside India and the Foreign Tax Credit claimed.
 
2) Part B

Part B of the form is where the assessee is required to provide details of refund of foreign tax due to carry backward of losses and disputed foreign tax.
 
3) Verification

The Verification section contains a self-declaration form in which the assessee has to affirm that the information given in Part-A and Part-B is correct and complete.

4) Attachments

The last section of the Form is Attachments, where the assessee needs to attach a copy of the statement or certificate and proof of payment/deduction of foreign tax.
 
Also Read: Options for Foreign Companies to Set Up Business in India

Time Limit For Furnishing Form 67

Now, this is where the amendment has taken place. So far, Foreign Tax Credit (FTC) could be claimed only if Form-67, along with the necessary documents, was furnished within the due date for filing the original Income-tax return in India, thereby limiting the ability of claiming credit for taxes paid abroad. It created many challenges for Indian residents who had earned abroad and incurred foreign taxes on such income as their foreign tax returns were not finalised by then.

Also, there are many cases pending at various appellate forums such as CIT (Appeals) and High Courts pertaining to FTCs since there have been divergent interpretations on the allowability of credit in the case of belated filing of Form 67. In some cases, it has also been held that FTC can’t be denied to the assessee for mere delay in filing Form 67. Accordingly, the taxpayers in such cases have been able to claim the credit even after filing the Form after the due date of filing the original return.

Now finally, the CBDT has amended Rule 128 to provide that Form 67 can be filed till the end of the assessment year relevant to the previous year in which the income corresponding to the FTC has been offered to tax in India, and the return for such AY has been furnished within the time specified under Section 139(1) (original return) or Section 139(4) (belated return).

For example: If a taxpayer has already paid taxes abroad on his foreign income and offers such income to tax in India in FY 2022-23, then to claim credit of the taxes paid abroad on such income against his tax liability in India, he can file Form 67 on or before 31^stMarch, 2024.

Further, the amendment has also clarified that where any assessee has filed an updated return under Section 139(8A), he can claim FTC in respect of the income declared in such updated return provided he furnishes Form 67 corresponding to such income on or before the date of filing of such return.

This amendment operates retrospectively from 1^stApril, 2022, so this benefit is available to all FTC claims filed during the current Financial Year, i.e., 2022-2023.

Summing Up

The above amendment will certainly provide much-needed relief to taxpayers who earn income from abroad and prevent them from permanently losing the benefit of the Foreign Tax Credit. It will also reduce tax disputes on FTCs since it has ruled out the scope for any confusion or ambiguity concerning the time limit for filing Form 67 and the allow ability of the credit, which was caused by different judicial precedents over the years.

In conclusion, the recent amendment in Rule 128 of the Income-tax Rules, 1962 by the Central Board of Direct Taxes brings significant relief to taxpayers claiming Foreign Tax Credit (FTC). The extension of the time limit to file Form No. 67 allows taxpayers to claim FTC until the end of the relevant Assessment Year, addressing challenges faced by Indian residents earning abroad. This amendment, effective from April 1, 2022, benefits all FTC claims filed during the current Financial Year.

Don't miss out on claiming your Foreign Tax Credit! Mail us at info@manishanilgupta.com to ensure you file Form 67 correctly and maximize your tax benefits.

Disclaimer: This content is purely for knowledge and educational purposes. It contains only general information and references to legal content. It is not legal advice, and should not be treated as such.