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Finance ministry unveils draft foreign tax credit guidelines
April, 19th 2016

In an effort to provide relief and clarity to Indian companies and individual taxpayers with overseas income, the revenue department on Monday proposed that tax paid in a foreign territory can be credited against minimum alternate tax (MAT) as well as for cess and surcharges paid in India.

The finance ministry had set up a committee under the Central Board of Direct Taxes (CBDT) to suggest ways of granting a foreign tax credit (FTC) after examining issues related to it.

On Monday, the finance ministry released the draft FTC rules, seeking comments from stakeholders by 2 May.

The absence of FTC rules is making it difficult for taxpayers and tax authorities to agree on credit claims and has led to uncertainty as well as litigation.

According to the draft rules, an assessee will be allowed a credit for the amount of foreign tax paid by him in a country or specified territory outside India, with which India has an agreement for avoidance of double taxation of income.

The credit will be available against surcharge, cess and minimum alternate tax payable in India. MAT is a tax levied on profit-making entities that don’t pay corporate income tax because of exemptions and incentives. However, interest, fee or penalty imposed on the company or individual will not be credited against any foreign tax.

No credit will also be available in respect of any amount of foreign tax which is disputed in any manner by the assessee.

To avail of foreign tax credit, an assessee has to submit a certificate from the tax authority of a country or territory outside India, specifying the nature of income and the amount of tax paid.

The assessee also would need to submit a declaration that the amount of foreign tax in respect of which credit is being claimed is not under any dispute.

The rules would offer clarity in various scenarios for measurement and eligibility of foreign tax credit, which often becomes an issue, said Rahul Garg, leader (direct tax) at PwC India.

“However, the source and destinationwise measurement criteria prescribed could make foreign tax calculations complex. It would be better if it is further simplified,” he added.

Sudhir Kapadia, national tax leader at EY India, said the latest clarification is in continuation of a recent salutary trend of the CBDT clarifying various issues with a view to provide certainty to tax demands.

“The draft FTC rules is a well-thought-out move to clarify the nature and conditions for availability of FTC to Indian taxpayers. Two points are noteworthy, namely, cess and surcharges in addition to tax will also be creditable and FTC will be available against MAT liability, too,” he added.

The draft rules for granting credit for foreign taxes paid demonstrate a positive intent on the part of the government, said Riaz Thingna, director, Grant Thornton Advisory Pvt. Ltd.

“One area that needs attention, however, is that Section 192 relating to TDS (tax deducted at source) on salary needs to be amended to allow taking the foreign tax credit into account while deducting tax from salaries of expatriate employees working in India. This will give relief from the cascading cash outflows for such employees,” he said.

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