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ASSOCHAM India Seeks Changes To Foreign Tax Credit Rules

by Mary Swire,, Hong Kong

31 May 2016

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has urged the Indian tax authority, the Central Board of Direct Taxes, to reconsider its proposed rules on foreign tax credit (FTC) so that the income of Indian taxpayers is not subject to double taxation.

The CBDT on April 18, 2016, published draft FTC rules according to which Indian resident taxpayers will be allowed a credit by way of a deduction (or otherwise) for the amount of any foreign tax paid in a country or specified territory outside India, in the year in which the income corresponding to such tax has been offered to tax or assessed to tax in India.

A high-level delegation led by Rajesh Garg, Chairman, ASSOCHAM's National Council on Direct Taxes, recently met CBDT Member Rani Singh Nair to highlight concerns about the proposed FTC rules. The delegation pointed out that it may be possible that in the initial years, FTC exceeds the amount of Indian taxes; whereas in the subsequent years, the Indian taxes exceed FTC. "In such a scenario, where, in the initial years, the foreign taxes, in excess of the Indian taxes is a dead loss to the company; if carry-forward is not allowed in the subsequent years, the company would be required to pay higher taxes," it said.

The delegation stressed that there may be difference in accounting mechanism followed by different countries, leading to double taxation concerns. It highlighted that source country may follow cash basis accounting, whereas, India follows accrual basis. Accordingly, in India, foreign income may be subject to tax in Year 1, whereas such income may be taxable in the source country in Year 4. "In order to address this [issue], it is suggested that carry-forward provision be introduced in the rules and the timeline for revision of the tax return of earlier years be appropriately amended for claiming FTC in the given situations."

TAGS: compliance | tax | investment | business | tax compliance | India | tax incentives | law | accounting | tax credits | enforcement | ministry of finance | tax authority | offshore | legislation | tax planning | tax reform | legislation amendments | trade | business investment | Tax

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