The taxpayer resident in one country may have a source of income situated in another country. This gives rise to double taxation. The Income Tax act itself offers certain provisions to give relief to an individual whose income is likely to be taxed twice. This relief measure lies in a Double Taxation Avoidance Agreement (DTAA) i.e a tax treaty that India signs with another country. In order to claim the relief, the taxpayer shall file Form 67.
What is Foreign Tax Credit?
If you have paid taxes in one country, you can claim the same as tax credits in the country of your residence when both the countries have DTAA. There are two rules to it which are as follows:
- Source Rule: This rule holds that income is to be taxed in the country in which it arises irrespective of whether the income arises to a resident or non-resident.
- Residence Rule: This rule holds that the power to tax should rest with the country of residence.
If the both rules apply simultaneously to an assessee there will be double taxation. Double taxation means taxing the same income twice in the hands of assessee.
Concept of Foreign Tax Credit in India
Sections 90 and 91 of the Income-tax Act deals with the concept of Foreign Tax Credit. These sections allow Indian residents to claim a credit of foreign taxes paid by a taxpayer against their total tax liability in India.
- Section 90 deals with claiming the foreign tax credit in a case where India enters into a double taxation avoidance agreement with another country. Provided the agreements mention claiming of such FTC
- While Section 91 deals with claiming of FTC in scenarios where India has not entered into a double tax avoidance agreement with the country where the income arises for a taxpayer
Under these sections, if the taxpayer is a resident of India, and he has paid taxes outside India, he can claim a credit of such foreign taxes paid against his tax payable in India. Rule 128 was introduced to define certain rules and regulations regarding foreign tax credit to remove any ambiguities in this regard. Some of them are as follows:
- Foreign tax credit can be claimed in the year in which the taxpayer’s income corresponding to such tax has been offered or assessed to tax in India;
- FTC shall be available against the amount of tax, surcharge, and cess payable under the Indian tax laws. But not against any interest, fee, or penalty;
- It shall not be available if the foreign tax is a disputed one;
- It is available even on tax payable under Section 115JB (Minimum Alternate Tax);
- FTC shall be the aggregate of the amounts of credit calculated separately for each source of income arising from a particular country;
- FTC shall be lower of, tax payable on such income under the Indian tax laws and the foreign tax paid;
- Foreign Tax Credit will be determined by the currency conversion during the foreign tax payment at the telegraphic transfer buying rate on the last day of the month, immediately preceding the month in which such tax has been paid or deducted.
Documents To Be Furnished For Claiming FTC
An assessee can claim Foreign Tax Credit in accordance with Rule 128, by furnishing the following documents on or before due date of filing of return:
- A statement of :
- foreign income offered to tax
- foreign tax deducted or paid on such income in Form No. 67
- Certificate or statement specifying the nature of income and the tax amount either paid by the taxpayer or deducted from their income :
- From the tax authority of the foreign country
- From the person responsible for the deduction of such tax
- Signed by the taxpayer
- Proof of tax payment outside India.
What is Form 67?
An individual taxpayer shall furnish Form 67 in order to claim Foreign Tax Credit. It is also essential to file Form 67 on or before the due date of filing the income tax return u/s 139(1) i.e. the original return of income.
Procedure to File Form 67
The Central Board of Direct Taxes (CBDT), vide notification no. 9/2017 dated 19 September 2017 provides the below mentioned procedure for filing Form 67:
- Taxpayers who are required to file their returns electronically must prepare and submit Form 67 online
- The taxpayer must be prepare and submit Form 67 either before or on the due date of filing the tax return
- This form is available on the e-filing portal of the income tax department in the taxpayer’s account.
- Digital Signature Certificate (DSC) or Electronic Verification Code (EVC) is mandatory to submit Form 67
Filling and submission of Form 67
Form 67 shall be available to all the taxpayers’ logins.
- Visit Income Tax Portal
Login using valid credentials on Income Tax Portal.
- Navigate to E-file
Select Income Tax Forms to prepare and submit online forms
- Select Form 67 and the AY from the drop down.
Instruction to fill the form is enclosed along with Form
- Fill in all the required details
Enter details of taxes paid outside India.
- 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.
Simply visit the official website of income tax department and select the Income Tax Form from E-File section. Search for the respective form in the search engine and then you will be able to download it.
Residence state is the home country of the taxpayer, while source state is a foreign country where the taxpayer is employed or receives income from.
Only resident Indians can claim for the tax credits, as long as they have paid taxes in another country.
Tax Residency Certificate helps establish which country you are a tax resident of in order to apply the relevant DTAA. And you can avail the benefits stated therein. India has made it mandatory to obtain TRC for a person who wants to avail any DTAA benefits of a treaty that India has entered into with another country.