Foreign Tax credit against MAT or AMT – RULE 128

Foreign Tax credit against MAT or AMT – Rule 128 of Income Tax Rules

The concept of double taxation implies that the same income is taxed twice, once in the country of source and thereafter in the country of residence (India in the present case). In order to facilitate free flow of economic resources and tax, its important that if a resident of India, earns overseas income, which suffers tax in the overseas jurisdiction, India provides a credit of overseas tax against tax payable in India. This is known as Foreign Tax credit. CBDT, vide Notification No. 54/2016 dated 27 June 2016, has laid down the procedure for relief or deduction of income-tax paid outside India. Such provisions are effective from April 1, 2017.

Meaning of Foreign Tax Credit – Rule 128 of Income Tax Rules

Circumstances	Foreign tax credit means
Country or territory outside India with which India has entered into a DTAA	Taxes covered under such DTAAs
Country or territory outside India with which there is no DTAA of India	Tax payable under the law in force in that country or territory outside India

Year of Availability of Foreign Tax Credit – Rule 128 of Income Tax Rules

FTC = Foreign Tax Credit

Year of availability of Foreign Tax Credit – Rule 128 of Income Tax Rules – Year in which income offered to tax

Any assessee being a resident shall be allowed a credit for the amount of any foreign tax paid by him in a country or specified territory outside India, by way of deduction or otherwise, in the year in which the income corresponding to such tax has been offered to tax or assessed to tax in India.

Example : –

Indian resident earns foreign income of Rs 5,00,00 during the PY 2017-18 . Tax of Rs 10,000 has been withheld on such income outside India in same year . However, such foreign income is taxable in India in PY 2018-19.

Solution: – In this case, Indian resident can avail Foreign Tax Credit only in AY 2019-20 and not in AY 2018-19.

Year of availability of Foreign Tax Credit – Rule 128 – FTC Spread across all years

Where income on which foreign tax has been paid or deducted, is offered to tax in more than one year, credit of foreign tax shall be allowed across those years (i.e ., All years in which income is offered to tax) in the same proportion in which the  income is offered to tax or assessed to tax in India.

Non availability of Foreign Tax Credit – Rule 128 of Income Tax Rules

The foreign tax credit shall not be available against following: –

a) Interest, fee or penalty: –

FTC shall be available against tax, surcharge and cess payable under the Act, but not against interest, fee or penalty payable thereunder.

b) Disputed Foreign Tax Credit: –

No foreign tax credit shall be available in respect of any amount of foreign tax or part thereof which is disputed in any manner by the assessee.

Exception: –

However, the credit of such disputed tax shall be allowed for the year in which such income is offered to tax or assessed to tax in India if –

• Assessee furnishes evidence of settlement of dispute, within 6 months from the end of the month when it is settled, and
• Evidence of discharging foreign tax liability;
• Furnishes an undertaking that no refund in respect of such amount has directly or indirectly been claimed or shall be claimed.

Mode of Computing Foreign Tax Credit – Rule 128 of Income Tax Rules

1. Foreign tax credit shall be aggregate of the amounts of credit computed separately for each source of income arising from a particular country or specified territory outside India.
2. The credit shall be the lower of the –
   1. tax payable under the IT Act, 1961 on such income; or
   2. the foreign tax paid on such income.
3. Where the foreign tax paid exceeds the amount of tax payable in accordance with DTAA, such excess shall be ignored.
4. The credit shall be determined by conversion of the currency of payment of 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 to be submitted for Foreign tax Credit – Rule 128 of Income Tax Rules

Assessee shall be required to furnish following documents on or before due date of filing return to avail foreign tax credit:  –

1. Statement of foreign income offered for tax and 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 assessee,—
   1. from the tax authority of the country or specified territory outside India; or
   2. from the person responsible for deduction of such tax; or
   3. signed by the assessee:

Note : –

Statement furnished by the assessee shall be valid if it is accompanied by

1. An acknowledgment of online payment or bank counter foil or challan for payment of tax [where the payment has been made by the assessee];
2. proof of deduction where the tax has been deducted.

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