Taxation Times

March 2024

Taxation Times March 2024
Picture of by Neha Raheja
by Neha Raheja

Senior Advisor - Direct & International Tax

In an increasingly globalized world, individuals and businesses engage in cross-border transactions, leading to tax obligations in multiple jurisdictions. India, like many other countries, has provisions to avoid double taxation on income earned abroad. One such provision is the Foreign Tax Credit (FTC) mechanism, which allows taxpayers to offset taxes paid in foreign jurisdictions against their Indian tax liability.

Coming to this month’s, Taxation Times, here’s what we have :

  • An article elaborating on the provisions of Foreign Tax Credit .
  • Case Laws from various courts & jurisdictions;
  • Tax Compliance Calendar: April 2024;
  • Circulars & Notifications, March 2024;
  • Tax News from around the world

We hope that you find this month’s edition of the Taxation Times useful. In case you have any feedback or need us to include any information to make this issue more informative, please feel free to write to us at info@uja.in

A Very Happy New Year 2024-2025 for Finance Enthusiasts!

Happy Reading!
Best Regards,
UJA Tax Team

Foreign Tax Credit (FTC): Importance, Concept and How to Claim FTC

Introduction

In an increasingly globalized world, individuals and businesses engage in cross-border transactions, leading to tax obligations in multiple jurisdictions. India, like many other countries, has provisions to avoid double taxation on income earned abroad. One such provision is the Foreign Tax Credit (FTC) mechanism, which allows taxpayers to offset taxes paid in foreign jurisdictions against their Indian tax liability.

The concept of FTC is a significant aspect of international taxation, particularly for individuals and businesses engaged in cross-border transactions. In India, the foreign tax credit mechanism allows taxpayers to claim a credit against their Indian tax liability for the taxes paid in a foreign country on the same income that is also subject to tax in India. The idea behind FTC is to prevent double taxation on the same income, ensuring that taxpayers are not taxed twice on the same earnings, once in the foreign country where the income is earned and again in India.

What is FTC:

FTC is a mechanism that prevents double taxation on the same income in both the taxpayer’s home country and the foreign country where the income was earned. In the Indian context, it allows taxpayers to claim a credit for taxes paid abroad against their Indian tax liability.

Suppose Mr. A is an Indian resident but earns interest income in the United States. The source state, i.e., the US, will withhold a percentage of the amount as tax. In addition, Mr. Ramana will also have to pay taxes on his U.S. income in India. This will result in double taxation on the same income. FTC is a facility that helps people like Mr. A avoid paying double tax on the same income.

Importance of Foreign Tax Credit in India:

  • Prevents Double Taxation:
    One of the primary reasons for introducing the foreign tax credit mechanism in India is to prevent double taxation of the same income. Without FTC, taxpayers earning income abroad would be subject to tax in both the foreign country and in India, leading to double taxation and reducing the incentive for cross-border trade and investment.
  • Promotes International Trade and Investment:
    By providing relief from double taxation, foreign tax credits encourage cross-border trade and investment by making it more attractive for Indian taxpayers to conduct business overseas. This promotes economic growth, fosters international business relationships, and enhances India’s position in the global economy.
  • Avoiding Tax Evasion and Tax Avoidance:
    The availability of foreign tax credit in India helps combat tax evasion and tax avoidance practices by ensuring that taxpayers accurately report their foreign income and pay the appropriate taxes, thus contributing to the overall integrity of the tax system.
  • Encourages Compliance and Transparency:
    Foreign tax credit requires taxpayers to maintain proper documentation and comply with relevant tax laws and regulations, promoting transparency and accountability in tax reporting and compliance.

The Concept of FTC in India:

As per the tax laws of India, sections 90 and 91 of the Income Tax Act, 1961, deal with the concept of FTC. Section 90 discusses claiming of FTC in a case where India has entered into a Double Taxation Avoidance Agreement (DTAA) with another country and such DTAA provides for claiming of such FTC, while Section 91 deals with claiming of FTC in scenarios where India has not entered into a DTAA with the country where the income arises for a taxpayer. Under these sections, if the taxpayer is a resident of India and has paid taxes outside India, he can claim a credit for such foreign taxes paid against his tax payable in India.

Rules for claiming FTC have been notified under Rule 128 w.e.f. 1.4.2017, which have helped clear out ambiguity around claiming of FTC, some of which have been briefly captured here under:

  • Only residents of India can claim FTC for taxes paid in foreign countries or specified territories.
  • FTC can only be claimed in the year when the foreign income is taxed in India.
  • FTC is limited to the proportion of income on which tax is paid or levied abroad.
  • FTC cannot be claimed on interest, fees, or penalties paid abroad.
  • If a Double Tax Avoidance Agreement (DTAA) exists between countries, only taxes covered by the agreement are eligible for FTC.
  • Disputed income amounts are not eligible for FTC unless resolved within six months with evidence of dispute settlement and no outstanding tax liabilities.
  • FTC is calculated separately for each source of income from each country.
  • The lower of the resident country’s tax payable and foreign tax paid is allowed as FTC.
  • FTC is available for income tax on foreign income under section 115JB (minimum alternate tax).
  • FTC amount is determined by converting the foreign tax payment currency at the telegraphic transfer buying rate on the last day of the preceding month.

Steps to Claim Foreign Tax Credit for Indian Residents with Foreign Income

  • Convert Foreign Income to INR:
    Convert foreign income into Indian rupees using the Telegraphic Transfer Buying Rate (TTBR) on the last day of the preceding month.
  • Classify Income:
    Classify foreign income into relevant categories such as salaries, interest, dividends, etc., and ensure it does not exceed the basic exemption limit of INR 2,50,000.
  • Claim TDS Credit: Refer to the DTAA with the source country and claim credit for any tax deducted at source (TDS) in the foreign country.
  • Obtain a TRC Certificate:
    Obtain a TRC to establish tax residency status and ensure eligibility for DTAA benefits.
  • Fill Schedule FSI: Enter details of foreign income in Schedule FSI of the Income Tax Return (ITR), including country code, taxpayer identification number, income amount, tax paid in the source country, and tax payable in India.
  • File Form 67: 
    Before filing the ITR for the particular, Form 67 is also required to be filed, in which particulars of the FTC along with relevant proof of tax deduction are also required to be attached.
  • Calculate Tax Relief:
    Calculate foreign tax relief as the lower of the tax paid in the foreign country or the tax payable in India, per applicable tax rates.
  • Provide DTAA details:
    Specify the relevant article of the DTAA applicable to the foreign income.

Case Laws

Jiangdong Fittings Equipments Co. Ltd. V/s ACIT (International Taxation) [2024] 160 taxmann.com 467 (Delhi - Trib.)
Reference: Section 9 of the Income-Tax Act, 1961, read with article 7 of the DTAA between India and China

Facts:

The assessee, a tax resident of China, was engaged in the business of the manufacture and supply of composite long rod insulators and other hardware fittings for optical fiber ground wire (OPGW) used in transmission lines.

During the year under consideration, the assessee received a certain amount of consideration on account of offshore supply made to Indian PSU’s, which the assessee had claimed to be not chargeable to tax under Indian Taxation and accordingly, claimed the refund of the corresponding tax credit.

The assessing officer, however, allocated 60 percent of the total receipts towards the supply of equipment and 40 percent towards the fee for technical service (FTS). Further, the calculation on the attribution of profit was done by considering 25 percent of the equipment supply and 100 percent of FTS. Accordingly, he made an addition on account of income chargeable on account of FTS and towards the taxable component of business receipts.

The DRP upheld the addition made by the assessing officer.

The assessee filed an appeal before the ITAT.

Held:

Assessee, a tax resident of China, received certain amount of consideration on account of offshore supply made to Indian PSU’s – Assessing Officer, however, allocated 60 per cent of total receipts towards supply of equipment and 40 per cent towards fee for technical service (FTS) – Accordingly, he made additions to income of assessee – Tribunal in assessee’s own case for earlier assessment years in Jiangdong Fittings Equipments Co. v. ACIT (International Taxation) [2023] 157 taxmann.com 109 (Delhi – Trib.) on similar issue had held that supply of goods and equipments was completed outside India and transfer of title over goods had passed from non-resident assessee to Indian PSU’s outside India in terms with contract, receipts from such supply could not be made taxable in India

In Favour of: The Assessee

Kishore Bhagwandas Ramnani V/s Income Tax Officer [2024] 161 taxmann.com 43 (Mumbai - Trib.)
Reference: Section 48 of the Income-tax Act, 1961

Facts:

During the year under consideration, the assessee, a NRI, had shown long term capital gain on sale of immovable property .Out of the capital gain, the assessee had invested part of the sum in the capital gain bond scheme as per section 54EC, offered tax on remaining capital gains and also claimed deduction of stamp duty and registration charges in respect of society transfer fees paid by the assessee out of the aforesaid capital gain amount.

The Assessing Officer had disallowed the claim of expenses on the ground that assessee had not furnished the supporting document regarding the payment of aforesaid expenditure claimed by the assessee.

The assessee filed objection before the DRP. The DRP has dismissed the objection filed by the assessee on the ground that original form no. 35A was not signed by the authorized representative and the fresh form no. 35A filed by the assessee cannot be considered because it was filed beyond time.

On appeal, the assessee contended that assessee had filed form no. 35A within the time through his authorized representative and subsequently, on raising objection by the DRP, the assessee had himself filed the fresh form No. 35A. Therefore, form no. 35A was filed within the time, which was only corrected on raising objection by the DRP

Held : 

It is found that assessee has already filed original form 35A within the time limit, however, same was corrected, as pointed out by the DRP, on the ground that authorized representative was not the right person to sign form 35A. After considering the above facts, it is evident that assessee has made correction to the form 35A, which cannot be treated as filed beyond time limit, therefore, there is no justification in the finding of the DRP for treating the form 35A as not filed. Further, on merit, it is found that the Assessing Officer has not considered that assessee has actually incurred the expenses pertaining to stamp duty and registration charges and society transfer charges as per the terms and conditions of the agreement and evidence of payment as reflected in the copy of bank statement. Therefore, the Assessing officer was directed to allow the claim of the assessee after verification of the copy of agreement and copy of bank statement filed by the assessee. Accordingly, the appeal of the assessee is allowed

In Favour of: The Assessee.

Circulars and Notifications March 2024

Notifications

CBDT notifies ITR Verification and Acknowledgement Forms applicable for AY 2024-2025.

notifies reduced tax rates on royalty and FTS with Spain by using the MFN clause

CBDT notifies changes in Form 3CD and Form 3CEB for AY 2024-2025.

Circulars

CBDT clarifies provisions under Finance Act 2023 relating to donations made by a trust / institution to another trust / institution for purposes of application of income

Press Release

Gross Direct Tax collections for Financial Year (FY) 2023-24 register a growth of 18.74%

Tax Compliance: April 2024

07 April 2024

  • Due date for deposit of Tax deducted/collected by an office of the government for the month of March, 2024. However, all sum deducted by an office of the government shall be paid to the credit of the Central Government on the same day where tax is paid without production of an Income-tax Challan

14 April 2024

  • due date for issue of TDS Certificate for tax deducted under section 194-IA/194-IB/194M/194S is February, 2024

30 April 2024

  • Due date for furnishing of Form 24G by an office of the Government where TDS/TCS for the month of March, 2024 has been paid without the production of a challan

    Due date for furnishing the challan-cum-statement in respect of tax deducted under section 194-IA/194-IB/194M/194S in the month of March, 2024

    Due date for deposit of Tax deducted by an assessee other than an office of the Government for the month of March, 2024.

    Due date for e-filing of a declaration in Form No. 61 containing particulars of Form No. 60 received during the period October 1, 2023 to March 31, 2024

    Due date for uploading declarations received from recipients in Form. 15G/15H during the quarter ending March, 2024​

Tax News from Around the World

UAE enables taxpayers to submit registration requests at 23 Government service centres

Canadian province to cut its small business corporate tax from 3% to 2.5%

UAE releases public consultation on implementation of Global Minimum Tax

Capital gain tax exemption on disposal of capital assets situated outside Malaysia provided to Residents

UAE publishes corporate tax guide on taxation of partnerships

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