CBDT proposes rules to help corporates claim credit for taxes paid overseas

To provide relief to corporates having income abroad, the tax department on Monday proposed simplified 'Foreign Tax Credit' (FTC) rules allowing companies to claim credit for taxes paid overseas.

The Central Board of Direct Taxes (CBDT) in its draft FTC rules said tax credit will be available to entities paying taxes in any country, including those with which India has Double Taxation Avoidance Agreement (DTAA).

"The credit for foreign tax shall be available against the amount of tax, surcharge and cess payable under the Act but not in respect of any sum payable by way of interest, fee or penalty," said the draft rules on which the CBDT has invited comments from stakeholders by May 2.

It further said no credit shall be available in respect of any amount of foreign tax which is disputed in any manner by the assessee.

The tax credit, CBDT said, will be the "aggregate of the amounts of credit computed separately for each source of income arising from a particular country or specified territory".

The tax credit shall also be available against minimum alternate tax (MAT) liability. "This will nip in the bud an issue that could have led to litigation," said Rakesh Nangia, Managing Partner, Nangia & Co.

The foreign tax credit, the draft rule said, shall be determined by conversion of the currency of payment of foreign tax at the telegraphic transfer buying rate on the date on which such tax has been paid or deducted.

The proposed rules will reduce the hassle in claiming credit from the Income Tax department on tax paid in other countries, Nangia said.

"Clarity on provisions relating to FTC shall provide the promised relief from double taxation agreed by way of Double Taxation Avoidance Agreements. Time to time clarification, announcement and notifications from CBDT providing tax clarity and tax simplicity are taking India to the next level of a tax simplified and non-adversarial tax regime," he added.

The entities claiming tax credit will have to submit proof of tax paid. These would include certificate from the tax authority or a TDS certificate, online acknowledgement of foreign tax payment and a declaration that the amount being claimed is not under any dispute.

The absence of FTC rules, Nangia said, was making it difficult for taxpayers and tax authorities to agree on credit claims and led to uncertainty as well as litigation. The FTC rules will provide much needed clarity and guidance on the issue.