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FTC Rules allowing resident taxpayers to claim credit for taxes paid overseas

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    CBDT notifies FTC Rules allowing resident taxpayers to claim credit for taxes paid overseas

    The Central board of direct taxes has notified foreign tax credit (FTC) rules laying down broad principles and conditions for computation and claim of foreign taxes paid in overseas countries by resident taxpayers. These Rules shall come into effect from 1 April 2017.

    with the objective of providing relief and clarity to resident taxpayers, the CBDT had setup a committee to suggest ways of granting FTC. Based on the recommendations of the committee, the CBDT had earlier released draft rules for granting FTC in respect of taxes paid in overseas countries by resident taxpayers, for seeking comments and suggestions from the public. These draft rules were summarised in our earlier tax insight dated 20 April 2016.

    After considering the comments and suggestions from the public, the CBDT has now notified Rule 128 under the Income-tax Rules, 1962 (the Rules) vide its Notification No. 54/2016 dated 27 June 2016. These Rules are summarised below:

    Meaning of foreign tax: In respect of a country with which India has entered into a double taxation avoidance agreement (tax treaty) – taxes covered under that tax treaty. In respect of any other country – the tax payable under the law in force in that country in the nature of income-tax.

    Mode of payment of foreign tax:Direct payment of tax or by way of deduction.

    Year of availability

    • FTC shall be available to the taxpayer in the year in which the income corresponding to such foreign tax has been offered/ assessed to tax in India
    • Where the income corresponding to foreign tax is offered to tax in more than one year, FTC shall be available across those years, in proportion to the income offered/ assessed to tax in India

    Tax against which FTC is available

    • FTC shall be available against the amount of tax, surcharge and cess payable under the Income-tax Act, 1961 (the Act);
    • FTC shall also be allowed against tax payment under Minimum Alternate Tax (MAT)/ Alternate Minimum Tax (AMT) provisions.

    FTC shall not be available

    • Against payment of any interest, fee or penalty under the Act;
    • Any amount of foreign tax disputed by the taxpayer

    Availability of credit of disputed foreign tax

    • Credit of disputed foreign tax shall be available for the year in which the corresponding income is offered to tax or assessed to tax in India, if the taxpayer furnishes the following evidence within 6 months from the end of the month in which disputed foreign tax is finally settled:
    • Evidence of settlement of dispute;
    • Evidence to the effect that the liability for payment of such foreign tax has been discharged by the taxpayer; and An undertaking that no refund in respect of such amount has been directly/ indirectly claimed or shall be claimed by the taxpayer

    Mode of computation

    Total available FTC shall be the aggregate of the amounts of FTC computed separately for each source of income arising from a particular country.

    • FTC shall be the lower of:
      • Tax payable under the Act on such income; or
      • Foreign tax paid on such income

    Where the foreign tax paid exceeds the amount of tax payable under the provisions of tax treaty, such excess amount shall not be considered

    Rate of exchange for conversion of FTC

    Telegraphic transfer buying rate (adopted by State Bank of India) on the last day of the month immediately preceding the month in which such tax has been paid or deducted

    MAT/ AMT credit to be carried forward

    Any excess of FTC available against tax payable under the MAT/ AMT provisions as compared to the tax payable under the normal provisions shall be ignored while computing the MAT/ AMT credit

    Documents required in order to claim FTC

    • The taxpayers shall be required to furnish following documents on or before due date of filing of tax return under the Act:
    • A statement of foreign income offered to tax and the foreign tax deducted or paid on such income in Form No. 67; and
    • Certificate or statement specifying the nature of income and foreign tax deducted or paid:
      • From the tax authority of the foreign country; or
      • From the person responsible for deduction of such tax; or
      • Signed by the taxpayer accompanied by proof of tax payment and/ or proof of deduction.

    Reporting in relation to refund of foreign taxes

    Taxpayer is required to report, in Form 67, the refund of foreign taxes on account of carry-backward of current year losses in overseas country, if any, which have been availed as FTC in India



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