What is double taxation?
Double taxation refers to income taxes paid on the same source of income. It occurs in international trade or investment where the same income is taxed in more than one country.
Example: Mr. A, resident of India is earning rental income from a property situated in USA. The rental income is taxed in the country of origin which is USA and also subject to tax in India leading to income getting taxed in both the countries.
How to avoid double taxation?
In order to eliminate the effects of double taxation, relief for taxes paid in foreign country is given to tax payer while taxing the same income in home country and this is termed as Foreign tax credit (FTC). The relief is claimed under two methods
- BILATERAL RELIEF:
When two countries agree to enter into a Double Taxation Avoidance Agreement (DTAA) then tax relief shall be calculated in accordance with the mutual agreement between two such countries.
- As per section 90 of the Income Tax Act, 1961 an Indian Resident can claim tax relief, if India has entered into a DTAA with the foreign country.
- Whereas, If India has entered into DTAA with specified association, then tax relief can be claimed under section 90A.
Bilateral relief may be granted by either of the following methods:
- EXEMPTION METHOD
Under exemption method, the income is taxed in source country (foreign country) and exempted in resident country.
- CREDIT METHOD
Under this method, the income which is taxed in the source country is also considered in the total income of the country of residence then the taxes paid can be claimed as tax relief for the same in India, by way of deduction or otherwise.
- UNILATERL RELIEF
When there is no DTAA between two countries, the relief shall be provided by the country of residence as per the provisions of sections 91.
When does this provision apply?
As per the provisions regarding scope of total income:
In the case of a person who is a resident of India the total income of any financial year includes all income from whatever source derived which accrues or arises to him outside India during such year.
- Available only for residents for the amount of foreign taxes paid by him in a foreign country
- Credit is available only if income corresponding to the taxes is offered for tax or assessed to tax in India during the year in which the credit is claimed.
- In the cases where the income for which the foreign taxes paid or deducted is offered to taxes for more than one year, the credit will be given across the years in the same proportion to which the income is offered to tax in India.
Computation of relief u/s 90
Step-1 Computation of Tax on Global Income based on Income tax act (i.e., Indian and Foreign income);
Step-2 Computation of average rate of tax (Amount of tax divided by Global Income);
Step-3 The amount of relief is lower of
- Amount computed by multiplying the average rate of tax (as computed in Step–2 above) on Global Income.
b) Amount of tax paid in foreign country.
For Example:
Say Mr. X an Indian resident earned INR 3,00,000 in India and his foreign income is INR 5,00,000. The amount of foreign tax paid is INR 20,000
Solution:
- The Global Income of Mr. X is INR 8,00,000.
- Tax payable as per provisions of Income tax act is INR 72,500 {(250000*5%) + (300000*20%)}.
- The average rate of tax is 9.0625% (72,500/8,00,000).
- The relief shall be INR 45,312 (5,00,000*9.0625%) or INR 20,000 whichever is Lower.
So in this Case, the amount relief is Rs. 20,000
Computation of relief u/s 91
Step-1 Compare the tax rate in India and in the foreign country.
Step-2 The amount of relief is – the amount derived by multiplying the lower tax rate with doubly taxed Income.
For Example:
Mr. X has a foreign income of INR 3,00,000. Applicable tax rate in India is 30% and the rate in foreign country is 20%.
The amount of relief is INR 60,000 (i.e., 3,00,000*20%)
Utilization of foreign tax credit
- FTC is eligible for adjustment against the tax, surcharges and cess payable under the IT Act.
- FTC cannot be adjusted against interest, fee or penalty payable under the IT act.
Rate of exchange for tax conversion into INR
The rate of exchange for the calculation of the value in rupees of any income accruing or arising or deemed to accrue or arise to the assessee in foreign currency or received or deemed to be received by him or on his behalf in foreign currency shall be the telegraphic buying rate of such currency rate as on the specified date.
What is telegraphic buying rate?
Telegraphic transfer buying rate in relation to a foreign currency means the rate or rates of exchange adopted by the State Bank of India for buying such currency, where such currency is made available to the bank through a telegraphic transfer.
For example,
If a Capital Asset is transferred on 31st July, 2022, the conversion rate would be the TT buying rate on the last day of the preceding month i.e. 30th June, 2022.
What is specified date?
- Salaries – the Last day of the month immediately preceding the month in which salary is due, or is paid in advance or in arrears;
- Interest on securities – the last day of month immediately preceeding the month in which the income is due;
- Income from House Property, Profits and Gains from Business or Profession [other than income referred to in (d)] and Income from other Sources[ not being income by way of dividend or Interest on Securities ] – the last day of the previous year of the assessee;
- Profits and gains of business or profession in the case of a non-resident engaged in the business of operation of ships – the last day of the month immediately preceeding the month in which such income is deemed to accrue or arise in India;
- Dividends – the last day of the month immediately preceeding the month in which the dividend is declared, distributed or paid by the company;
- Capital Gains – the last day of the month immediately preceeding the month in which the capital asset is transferred.
What is the form required to be filed for claiming foreign tax credit?
For the purpose of claiming the foreign tax credit, it is mandatorily required to furnish online the “Form No 67” as prescribed on or before the filing of return of income.
What is the procedure for filing the form 67?
Documents required to be provided for claiming the foreign tax credit:
1. statement of Income from the foreign country
2. certificate or statement indicating the nature of income and the amount of tax deducted or paid
- from the tax authority of foreign nation; or
- from the person who is responsible for deduction of such tax; or
a statement signed by the taxpayer accompanied by the following documents:
-where tax has been paid: an acknowledgement or challan for online payment or bank counterfoil
– where the tax has been deducted, proof of deduction.
Author
Swarna Sri K J
