How the FTC credit is allowed under Income tax laws ?

Credit is allowed on foreign tax paid to the extent of tax payable in India on such income. FTC would be available against tax, surcharge and cess payable under the Income-tax Act, 1961, including minimum alternate tax (MAT), but not in respect of interest, a fee or penalty. To claim FTC, taxpayers have to submit proof of the tax paid or deducted at source in the foreign country. The claim would be accompanied by a self-certified form in the prescribed format before the due date for filing of return of income. For the calculation of FTC, the conversion would need to be done using the exchange rate as on the last day of the month immediately preceding the month in which the foreign tax was paid or deducted.

Although CBDT has taken cognisance of industry recommendations on various points, it appears that a few have missed their attention.
FTC is available in the year income corresponding to such foreign tax is assessed in India. Accordingly, where income corresponding to foreign tax is offered to tax in more than one year, FTC would be allowed in those respective years. This would certainly help in ironing out the differences arising due to different financial years followed in different jurisdictions, but would not completely address the issue that was raised. It was expected that the final rules would allow the carry forward and set-off of tax credit. This would have helped companies to utilise FTC entirely regardless of differences in computational provisions (like different depreciation rates, accrual versus cash system); however, this point seems to have been overlooked.

In the case of disputed demands, FTC would only be allowed once the dispute in a foreign jurisdiction is settled subject to furnishing of evidence of the final settlement of such dispute. Since a detailed procedure has not been prescribed in this regard, the claim of such FTC may pose practical difficulties, especially where a dispute involving a foreign jurisdiction drags on for a number of years (due to which the time limit for revising tax returns in India would expire and the assessment proceedings would be concluded). Detailed guidelines on this aspect may be issued to ensure that such practical difficulties are addressed.

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How the FTC credit is given, since different countries have different tax rates ?

The credit of foreign taxes is to be aggregated for each source of income arising from a particular country. The above approach may lead to undue hardship. Due to different tax rates in various countries for each source of income, credit of foreign taxes paid in an overseas country may not be entirely utilised even though the aggregate taxes paid in India on such total income may be higher. The industry had recommended that foreign tax be clubbed and seen together against the aggregate taxes payable in India on such incomes. This recommendation has not found favour. In addition, the final rules do not deal with complications arising in the case of re-characterisation of income. (For example, if applying thin capitalisation rules, the source country treats the interest payment as dividend distribution and thereby subjects such interest to the withholding tax rate applicable to dividends).

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Can the FTC credit is allowable under MAT ?

While FTC has been allowed against MAT, for the purpose of subsequent MAT credit such excess FTC over normal profits apparently has to be ignored. The complete benefit of foreign tax will seemingly not be passed on if the companies are taxable under the MAT regime. Clarity on this aspect was expected in the final rules; however, this aspect has not been addressed.

Apart from the above, the rules were also expected to clarify the availability of FTC in some complicated non-routine situations. Guidance would have been useful to avoid unnecessary disputes in cases like where a foreign company is considered a resident due to provisions of place of effective management or where taxes are not covered by a treaty like branch remittance tax or triangular cases.

The FTC rules are a welcome step towards bringing uniformity and reducing litigation, and they will provide significant relief to resident taxpayers having foreign operations and income on which taxes are being paid in overseas countries. Further, relaxation of the requirement of obtaining a certificate from foreign tax authorities, as provided for in the draft rules, indicates a practical approach to FTC claims in India.

However, with the aim of providing an effective remedy to the taxpayer and facilitating easy claim of FTC, the final rules could have considered a few of the suggestions discussed above and issued detailed guidelines on the same.

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What is FTC relief for Income tax ?

A foreign tax credit (FTC) is allowed to a taxpayer by his/her country of residence to mitigate the impact of double taxation. In the Indian context, the statute provides relief from double taxation both under the domestic tax law and under double taxation avoidance treaties that India has entered into. However, due to the absence of rules and regulations, disputes have often arisen in the past on the computation of FTCs.

Based on the recommendations of the Tax Administration Reforms Commission, the Central Board of Direct Taxes (CBDT) has notified FTC rules for the computation and claim of taxes paid by resident taxpayers in overseas countries. CBDT had earlier released draft rules for granting of FTC and sought suggestions from various stakeholders. The rules that have now been released shall come into effect from April 1, 2017.

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Operation of NRO account by citizen of UK with PIO card

Question :

My daughter, who is a doctor by profession, went to the UK after her marriage in 2006. After clearing various examinations, she joined the services with NHS as a GP and two years ago she got the Citizenship of the UK with PIO card. While in India she was having a savings bank account which was changed to NRO account in 2010 and the bank is deducting income tax on interest income as per rules. She is also having a LIC policy of LIC of India for which the last premium was paid three years ago out of this bank account, but this policy will mature in 2025. My queries are as follows:

(a) Can she continue with NRO bank account? If yes, what are the formalities that need to be completed?

(b) What will be the procedure to get the maturity amount of LIC policy? Can she get it in the UK or whether it will be credited to some Indian account? Please advise.

Answer :

(a) Your daughter can continue to have NRO bank account in India. The bank account having already been converted, in my opinion no further formality is required. However, you can still check up with the bank concerned and in case the bank suggests some other formalities to be complied, she may have to comply with the same.

(b) The maturity amount of insurance policy taken in India should be deposited in her NRO account. She can remit up to $1 million outside India in a financial year from such NRO

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Operation of PPF Account in NRO & NRE account by NRI

Question :

My son is an NRI. I have following queries:

i) What can he do about his PPF account? How can he get this amount to the UK?

ii) He has a NRO and NRE accounts in India. His income from rent and interest etc. is deposited into his NRO account. He submits annual income tax returns every year. How can he get this NRO amount in the UK?

Answer :

i) The amount received at the time of closure of the Public Provident Fund account should be deposited in the NRO account of your son. Your son can remit an amount of $1 million outside India from his NRO account in a financial year.

ii) It has been stated in the query that your son is earning interest on rental income in India which is being deposited in NRO account. Out of the deposits so made in the NRO account, he can remit an amount of $1 million outside India in a financial year.

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Question : We had been living in London since November 2016. However, we want to wind up and move back to India, rather prematurely. We had bought a lot of new household goods and assets while we were there, including a car. We can sell that and a lot of the large white goods. We will bring back with us what we can but we will also have some cash. Please explain how this money will be taxed in India. I fall in the highest tax bracket.

Answer : Taxability in India depends on the following factors:
(a) Source of income
(b) Residential status

Typically, source of income lies where the services are performed, or where the asset, from which the income arises, is located.
Residential status in India is determined based on your physical presence in India in the current financial year (FY) (1 April to 31 March) and preceding 10 FYs .

If an individual satisfies any of the basic conditions mentioned below she would qualify as a resident, otherwise she would qualify as a non-resident (NR):
Basic conditions:

a) Stay in India during the FY is 182 days or more; or
b) Stay in India during the relevant FY is 60 days or more and in the 4 immediately preceding FYs is 365 days or more.

The 60 days mentioned above are extended to 182 days in case of Indian citizens going outside India for employment outside India.
A resident would qualify as a resident and ordinarily resident (ROR) if both the below mentioned conditions are satisfied otherwise she would qualify as a resident but not ordinarily resident (RNOR):

Additional conditions:
a) Resident in India in 2 of 10 FYs preceding the relevant FY; and
b) Stay in the 7 years preceding the relevant FY aggregates 729 days or more.
An individual qualifying as ROR is taxable on her global income and is required to report her global assets in her India tax return. However, an individual qualifying as NR or RNOR is taxable only on her India-source income (this is, income earned in India or received in India).

Assuming that this is the first time you went outside India, you would most likely qualify as an ROR in India for FY 2017-18 (as you would satisfy the basic as well as the additional conditions given above) and accordingly your global income would be taxable in India and global assets will need to be reported in India. Benefit may be claimed under the Double Tax Avoidance Agreement between India and other country in case of double taxation.

Hence, any income received while you were outside India will be taxable in India as per the applicable slab rates. Any income from sale of goods that are in the nature of personal effects such as white goods, car or any other movable property held for personal use is not taxable in India. Cash, if it represents income earned (other than from sale of goods in the nature of personal effects) outside India will be taxable in India as you qualify as ROR in India. There should be proper explanation with respect to source of cash.

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