Foreign Tax Credit – Claiming and Remembering to File Form 67

In a more global economy, a growing number of Indians living in the country receive foreign income from overseas jobs, professional consulting, investments, or business ventures. Given that India is guided by the principle of taxing residents on their international income, this income is also taxable in India. Meanwhile, the same income can already be taxed in the country of its acquisition. To prevent such dual taxation, Indian tax law provides relief in the form of the Foreign Tax Credit (FTC). Inasmuch as FTC is a good provision, it is subject to formal adherence to the procedures, the most essential one being the timely filing of Form 67. Disregard of this requirement would result in the denial of credit, even if one pays taxes in a foreign country.

Meaning and Legal Provision of Foreign Tax Credit

Foreign Tax Credit is a credit given to an Indian taxpayer on the payment of income tax abroad on the income that is also liable to tax in India. Rather than avoiding it, the Indian law offers a deduction to foreign tax paid on the Indian tax liability on the foreign income, whereby there is a limit imposed on the foreign tax paid.

Section 90 and Section 91 of the Income-tax Act, 1961, as it is read with Rule 128 of the Income-tax Rules, 1962, contain the legal framework of FTC. Section 90 applies to situations involving India and another country entering into a Double Taxation Avoidance Agreement (DTAA), and relief is availed under the treaty provisions. Section 91 provides unilateral relief in cases where no DTAA is in place. Rule 128 provides the procedural requirements, the way of computation and the documentation, including the compulsory filing of Form 67.

Eligibility and Nature of Income Covered

1. A resident taxpayer in India may claim a Foreign Tax Credit on income that was also subject to taxation in a foreign country and paid income tax there.
2. Individuals who work in foreign countries, offer services abroad, have businesses in foreign countries, and earn income on foreign assets are all eligible as taxpayers.
3. FTC is subject to claim, provided the inclusion of the foreign income in the total income during filing of the Indian income tax return.
4. The foreign income (salary, business or profession income, interest, dividends, capital gains or any foreign investment) is available under credit.
5. Only income tax paid in a foreign country is taxable under FTC, and not penalties, interest, or any other statutory taxes.

Step-by-Step Process

Procedure of claiming Foreign Tax Credit in a step-by-step manner:

• Computation of foreign income under the respective head of income according to Indian tax law.
• Such foreign income should be included in total income when filing an income tax return.
• Determine foreign tax paid on such income both on a country-by-country basis and a source-by-source basis.
• Enquire the presence of a DTAA between the foreign country and India.
• Use the relevant provisions under the DTAA or Section 91 as may be applicable.
• Calculate FTC as foreign tax paid or Indian tax payable on such income, whichever is less.
• Access the income tax e-filing portal.
• Submission of file Form 67 is electronically before or on the due date under section 139(1).
• Supporting documents uploaded for foreign tax paid.
• File and claim FTC in the corresponding schedules.

Documents Required to Claim Foreign Tax Credit

1. Evidence of payment of foreign taxes, such as a challenge or a receipt slip.
2. Tax certificates that are issued by a foreign payer are withheld.
3. Copy of a foreign tax return that is made in the foreign jurisdiction.
4. Salary slips or income statements that represent foreign income.
5. Bank statements of foreign income receipts.
6. Self-declaration in situations where no official documentation is provided, which can be done in accordance with Rule 128.
7. Information on relevant DTAA provisions, where a treaty relief claim is made.

Common Mistakes and Practical Takeaways

• Failure to meet the deadline for completing Form 67.
• Taking credit in relation to other types of taxes other than income taxes.
• A failure to classify foreign income under the Indian tax heads.
• The inability to reconcile foreign income with Schedule FSI and Schedule TR on the return.
• Implementation of DTAA without checking the conditions of eligibility.
• Claiming the FTC on such income in excess of the Indian tax payable thereon.
• Failure or partial disclosure of country-wise tax information.

Computation of Foreign Tax Credit

Foreign Tax Credit is calculated on a country-by-country basis and source-by-source basis. The limit of credit is the lesser of the tax paid to the foreign country and the tax payable to the Indians on the same income. This is such that excess foreign tax paid cannot be considered a credit in India in case the foreign tax rate is higher than the Indian tax rate. On the same note, FTC may not surpass the overall Indian tax liability of such income. Any surplus credit is not refundable or carry forward.

Importance of Filing Form 67

Form 67 is a prescribed electronic form, which should be filed by the taxpayers claiming the Foreign Tax Credit. It includes the information on foreign income received, foreign taxes paid, country-specific break-up, and the legal grounds that justify the claim of relief under DTAA or under home law. Under Rule 128, it is a procedural requirement that requires the filing of Form 67.

Form 67 should be submitted by the due date of filing of the income tax return under Section 139(1). It is preferable to be filed prior to filing the return in order to have a smooth processing. The failure to submit Form 67 in due time can lead to rejection of the FTC in the process of assessment. Even though, in some instances, the courts have allowed relief to be provided in cases where Form 67 was made late, litigation is perilous and can be avoided by taking the right action in time.

Conclusion

The Foreign Tax Credit is an essential relief schedule for Indian residents who generate global income, ensuring that such income is not taxed twice. Nevertheless, the advantage of FTC is directly associated with procedural discipline. Form 67 should be filed in time, properly computed, and documented to claim the credit successfully. A proactive and compliant strategy is not only tax-efficient but also less risky in terms of tax disputes with the tax authorities.