Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
Popular Search: ACCOUNTING STANDARD :: form 3cd :: due date for vat payment :: list of goods taxed at 4% :: ARTICLES ON INPUT TAX CREDIT IN VAT :: Central Excise rule to resale the machines to a new company :: ACCOUNTING STANDARDS :: TAX RATES - GOODS TAXABLE @ 4% :: VAT RATES :: empanelment :: articles on VAT and GST in India :: VAT Audit :: TDS :: cpt :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes
« News Headlines »
 Draft Rules for prescribing the method of valuation of fair market value in respect of the trust or the institution-Chapter XII-EB of the Income-tax Act, 1961- reg.
 India is moving towards a flawed GST
 ICAI to organise two-day international conference in Hyderabad
 Here's how to calculate tax payable on your capital gains
 Income Tax calculations for the financial year 2016-17
 CPE Events 17 October - 22 October 2016
 High Court raps I-T Department for wrong tax demand
  CBDT signs 5 advance pricing pacts with Indian taxpayers
 Finance ministry warns tax officials of action against GST protest
 Big changes for small units under GST
 Parliament’s winter session to begin on November 16 to expedite GST rollout

Take credit for tax paid abroad
April, 24th 2007

A tax credit can be termed as a deduction of taxes already paid to the government treasury from taxes payable by a taxpayer. Such tax credits may be claimed under the Indian Income-tax Act. An individual may claim credit for taxes in the form of foreign tax credits (FTC) for taxes paid in a foreign country.

Globalisation of business operations and liberalisation of exchange control regulations have led to increased movement of personnel and capital across borders. India has gradually established itself as a global hub of talent and a major source of skilled human resources. In view of this, foreign tax credits have assumed great significance when determining the overall taxability of an individual earning income from abroad.

Generally, double tax relief is provided in the article on Elimination of Double Taxation incorporated in Article 23 of most tax treaties. The said article provides the mechanics of claiming the relief. Since a resident is generally taxed on his worldwide income, it is the country of residence that typically provides relief from double taxation.

Accordingly, the primary objective of the treaty is to eliminate double taxation in the country of residence. In cases where India does not have a treaty with the foreign country in question, credit may be claimed under the relevant section of the Indian Income-tax Act.

Practically, when applying the principles laid down for claiming FTCs, a host of issues surface, necessitating greater clarity in the intention and implementation of Article 23. One of the key issues regarding availability of FTCs is in cases where different countries follow different tax years.

For example, the US follows the calendar year (i.e. year ended December 31) as the tax year, whereas in India, the tax year runs from April 1 to March 31. In such cases, a tax resident of India may face difficulty in claiming FTC for taxes paid in the US, as he may not be able to provide appropriate evidence of taxes paid.

Issues also arise in situations where excess taxes are deducted in the foreign country, resulting in a refund on the foreign tax return; or in the reverse case, where additional taxes are required to be paid in the foreign country on assessment. Further, there is lack of clarity regarding the exchange rate to be applied in computing the foreign taxes for which a credit is to be claimed.

Indian employers are increasingly deploying their employees for varied assignments around the world. Under a typical structure of these global assignments, an Indian employee in an Indian company is deputed to a foreign country, say the US. The Indian company is the primary employer and continues to pay salary to its deputed employee.

In addition, the employee is paid an overseas allowance during his deputation. The income earned by the employee is subject to withholding tax in the US. The Indian company, being an employer of the deputed employee, would be required to withhold taxes on the salary income of the employee.
One of the key issues faced by employers is whether FTC should be considered when computing the taxes to be withheld. Although an amendment has been made to the Indian Income-tax Act, clarifying that FTC should be considered when computing self assessment tax, no such amendment has been made to the relevant section of the Act dealing with tax withholding on salary.

An issue also arises in a case where the foreign country and the country of residence characterise the same income differently, resulting in the same income being taxed differently in the two countries.

For example, a difficulty may arise in claiming credit for taxes paid in a foreign country on profits from sale of shares, which are treated as capital gains in one country and business income in the other.

In addition to the above issues, an individual may also face certain compliance issues such as obtaining tax residency certificate, providing evidence of taxes paid in the foreign country, etc.

Aashish Kasad & Poonam Mehta Ghelani
Ernst & Young

Home | About Us | Terms and Conditions | Contact Us
Copyright 2016 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - Our Vision

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions