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Taking foreign tax credit set to become easier from 2013-14
January, 07th 2013

Good news for all individuals and companies facing difficulties in taking legitimate tax credits in India for the tax paid in other countries: The hassles in taking credit from the Income-Tax Department for the tax payments on their income in other countries is set to subside.

The Central Board of Direct Taxes ( CBDT) is drafting rules for foreign tax credit (FTC), to bring in clarity in its administration.

The rules are expected to come into force from April 1. At present, there are no set rules for foreign tax credit, making it difficult for assessees to decide on credit claims and leads to either undue harassment for the taxpayers or litigation. The guiding principle to decide on FTC is the double tax avoidance agreement (DTAA) with the country in which tax has been paid, for which the credit has to be taken in India. If the tax payment has been made in a country with which India does not have a DTAA, the Income-Tax Act provisions are the deciding factors.


Absence of rules at present results in undue harassment
CBDT sets up panel to draft foreign tax credit rules
Suggestions asked from Nasscom, CII, Ficci, Assocham and tax experts
Panel to submit report by February 28
Rules to specify method, amount & manner for taking foreign tax credit
Girish Vanvari, co-head tax, KPMG India, says: “Laws are very naive. You don’t cover all situations. The question is how to compute taxes in cases like dividend, distribution, etc, in which tax rates are different in different countries”.

Vanvari stresses as the business is becoming more and more international, it is required there is clarity in the rules. “Issues like foreign exchange variations and difference in the timing of filing tax returns should also be tackled,” he says.

To answer these concerns, CBDT has set up a committee for drafting the rules, which has to give its report by February 28.

The committee is studying the system of FTC in India and the best international practices associated with FTC rules. It will suggest draft rules on the methods for computing the amount of credit, manner of claiming credit and other particulars necessary for claiming relief or avoidance of double taxation.

As the FTC rules are critical for professionals and companies in information technology and other sectors engaged in other countries, the panel is taking inputs from these segments and also tax experts as directed by CBDT.

The suggestions have been asked from associations such as Nasscom, the Federation of Indian Chambers of Commerce and Industry, the Confederation of Indian Industry, the Associated Chambers of Commerce and Industry of India, and various others associated with taxation.

The Direct Taxes Code (DTC) seeks to streamline the system and has proposed FTC rules under section 207. According to tax experts, the government can bring in FTC rules, even without DTC, whenever it wants.

Clause 207 of the DTC Bill, 2010, is associated with foreign tax credit allowable to an assessee, being a resident in India in any financial year on income which is taxed in India as well as outside India.

The clause states that where the assessee is required to pay Indian income-tax in respect of an income that has been taxed in any specified territory or other country with which India has a DTAA, the foreign tax credit will be allowed in accordance with the agreement.

Where there is no such agreement, the tax credit will be determined at the Indian rate of tax or the rate of tax of the other country, whichever is lower.

The credit in either case will not exceed the Indian income-tax payable in respect of income which is taxed outside India and the Indian income-tax payable on total income of the assessee. It also provides that CBDT, for the relief or avoidance of double taxation, prescribes the method for computing the amount of credit, manner of claiming credit and other particulars.

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