What is Foreign Tax Credit (FTC)?

Assume a scenario where a taxpayer is a tax resident of Country A (Residence State) and he is in receipt of income from Country B (Source State). The Source State withholds a portion of taxes on the income received by the taxpayer in that country. Further, the Residence State, according to its tax laws, would tax the taxpayer on his worldwide income which would include income from the Source State too.

This would result in the taxpayer getting taxed on his income twice i.e. once in the Source State and once in the Residence State. To address this, the tax laws in various countries provide for a mechanism whereby the Residence State allows a deduction of taxes paid in the Source State from the total tax liability in the Residence State.

The concept of claiming deduction or credit of taxes paid in Source State against tax liability in Residence State is called Foreign Tax Credit.

The concept of FTC in India

As per the tax laws of India, sections 90 and 91 of the Income-tax Act deal with the concept of FTC. Section 90 discusses claiming of FTC in a case where India has entered into a Double Taxation Avoidance Agreement (DTAA) with another country and such DTAA provides for claiming of such FTC while Section 91 deals with claiming of FTC in scenarios where India has not entered into a DTAA with the country where the income arises for a taxpayer. Under these sections, if the taxpayer is a resident of India, and he has paid taxes outside India, he can claim a credit of such foreign taxes paid against his tax payable in India.

Rules for claiming FTC have been notified under Rule 128 w.e.f 1.4.2017 which have helped clear out ambiguity around claiming of FTC, some of which have been briefly captured here under:

1. FTC is to be allowed in the year in which the income corresponding to such tax has been offered or assessed to tax in India;

1. FTC shall be available against the amount of tax, surcharge and cess payable under the Indian tax laws but not against interest, fee or penalty;

1. FTC shall not be available if the foreign tax is a disputed one;

1. FTC is available even on tax payable under Section 115JB (Minimum Alternate Tax);

1. FTC shall be the aggregate of the amounts of credit computed separately for each source of income arising from a particular country;

1. FTC shall be lower of, tax payable on such income under the Indian tax laws and the foreign tax paid;

1. FTC shall be determined by conversion of the currency of payment of the foreign tax at the Telegraphic Transfer Buying Rate on the last day of the month immediately preceding the month in which such tax has been paid or deducted.
   

Documents required to be furnished for claiming FTC

In accordance with Rule 128, in order to claim FTC, the taxpayer is required to file following documents on or before due date of filing of return:

1. A statement of :

1. foreign income offered to tax

1. foreign tax deducted or paid on such income in Form No. 67
   

2. Certificate or statement specifying the nature of income and the amount of tax deducted therefrom or paid by the taxpayer :

1. From the tax authority of the foreign country

1. from the person responsible for the deduction of such tax

1. signed by the taxpayer
   

3. Proof of payment of taxes outside India.

Form 67

Form 67, as mentioned above, is a crucial document that has to be furnished in order to claim FTC by a taxpayer.  It is also essential that it be furnished on or before the due date of filing return of income under section 139(1) i.e. the original return of income.

Procedure for filing Form 67

The CBDT, vide notification no. 9/2017 dated 19 September 2017 has prescribed the procedure for filing Form 67 which have been enumerated here:

1. Form 67 is to be prepared and submitted online for taxpayers who are mandated to file their income tax returns electronically;

1. This form is available on the e-filing portal of the income tax department in the taxpayer’s account.

1. Digital Signature Certificate (DSC) or Electronic Verification Code (EVC) is mandatory to submit Form 67
   

Follow the below steps to fill and submit Form 67 through online mode.

Step 1: Log in to the e-Filing portal using your user ID and password.

Step 2: On your Dashboard, click e-File > Income Tax Forms > File Income Tax Forms.

Step 3: On the File Income Tax Forms page, select Form 67. Alternatively, enter Form 67 in the search box to find the form.

Step 4: On the Form 67 page, select the Assessment Year (A.Y.) and click Continue.

Step 5: On the Instructions page, click Let’s Get Started.

Note: It is mandatory to attach a copy of the certificate or statement and proof of payment/deduction of foreign tax in the Attachment section to proceed further.

Step 6: On click of Let’s Get Started, Form 67 is displayed. Fill in all the required details and click Preview.

Step 7: On the Preview page, verify the details and click Proceed to e-Verify.

Step 8: Click Yes to submit.

Step 9: On clicking Yes, you will be taken to the e-Verify page.

Note: Refer to How to e-Verify user manual to learn more.

After successful e-Verification, a success message is displayed along with a Transaction ID and Acknowledgement Number. Please keep a note of the Transaction ID and Acknowledgement for future reference. You will also receive a confirmation message on the email ID registered on the e-Filing portal.