Chapter 22: Double Taxation Relief & Foreign Tax Credit
1. Bilateral Double Taxation Relief (Section 90)
| Method | Mechanism of Elimination | Practical Operation |
|---|---|---|
| Exemption Method | Foreign income is completely excluded from the tax base in the home country. | Rarely used in India (mostly for specific employment income or diplomatic services). |
| Tax Credit Method (Ordinary Credit) | Worldwide income is taxed in home country, but credit is allowed for foreign tax paid. | Standard Indian Treaty Mechanism. Credit is restricted to lower of foreign tax or Indian tax attributable to that income. |
Section 90(2) Golden Rule: Where India has entered into a DTAA, the provisions of the Income-tax Act or the DTAA, whichever is more beneficial to the assessee, shall apply!
2. Unilateral Relief Formula (Section 91)
Applicable where an Indian resident derives income from a foreign country with which India has NO DTAA. All 4 statutory conditions must be satisfied:
- Assessee was a Resident in India during the previous year.
- Income accrued or arose to him outside India.
- Tax has actually been paid in the foreign country on such doubly taxed income.
- No bilateral agreement exists between India and that country u/s 90.
Section 91 Mathematical Relief:
$ ext{Relief u/s 91} = ext{Doubly Taxed Income} imes ext{LOWER of:}$
(a) $ ext{Indian Rate of Tax} = rac{ ext{Total Indian Tax Payable}}{ ext{Total Income}}$, OR
(b) $ ext{Foreign Rate of Tax} = rac{ ext{Foreign Tax Paid}}{ ext{Foreign Doubly Taxed Income}}$.
$ ext{Relief u/s 91} = ext{Doubly Taxed Income} imes ext{LOWER of:}$
(a) $ ext{Indian Rate of Tax} = rac{ ext{Total Indian Tax Payable}}{ ext{Total Income}}$, OR
(b) $ ext{Foreign Rate of Tax} = rac{ ext{Foreign Tax Paid}}{ ext{Foreign Doubly Taxed Income}}$.
3. Foreign Tax Credit Rules (Rule 128)
| Parameter | Rule 128 Statutory Restriction |
|---|---|
| Eligible Assessee | Resident of India claiming credit for foreign taxes paid. |
| Tax Base Scope | Credit allowed against Tax, Surcharge, and Cess. |
| Bar on Penalty/Interest | Credit is NEVER ALLOWED against interest, fee, or penalty under the Act. |
| Country-by-Country Limit | FTC is computed separately for each country on a source-by-source basis. |
| Maximum Credit Ceiling | FTC cannot exceed the Indian tax payable on that foreign income. Excess credit lapses (no carry forward of FTC in India). |
4. Form 67 Compliance Mandate
• Requirement: Assessee must furnish Form 67 electronically along with certificate or statement specifying foreign income and tax deducted/paid.
• Due Date: Must be furnished on or before the end of the Assessment Year (or due date of updated return u/s 139(8A)).
• Judicial Position: Supreme Court and ITAT benches have held that filing Form 67 is directory and not mandatory for grant of substantive credit, but timely compliance avoids automated disallowance!
• Due Date: Must be furnished on or before the end of the Assessment Year (or due date of updated return u/s 139(8A)).
• Judicial Position: Supreme Court and ITAT benches have held that filing Form 67 is directory and not mandatory for grant of substantive credit, but timely compliance avoids automated disallowance!
5. High-Frequency Exam Traps
Trap 1: Business loss in India reduces Indian tax rate!
When calculating Indian average tax rate ($ ext{Total Tax} / ext{Total Income}$), ensure set-off of domestic losses is factored in. If domestic income is negative, total income is lower, altering the average rate!
When calculating Indian average tax rate ($ ext{Total Tax} / ext{Total Income}$), ensure set-off of domestic losses is factored in. If domestic income is negative, total income is lower, altering the average rate!
Trap 2: Section 91 is strictly for RESIDENTS!
A non-resident or RNOR cannot claim unilateral relief under Section 91 under any circumstances!
A non-resident or RNOR cannot claim unilateral relief under Section 91 under any circumstances!