In the backdrop of the government fine-tuning tax regime with the countries which have the Double Taxation Avoidance Agreement (DTAA) with India, the ASSOCHAM has made a presentation to the Central Board of Direct Taxes (CBDT) suggesting changes in the proposed Foreign Tax Credit rules to ensure the Indian tax payer is subjected to double tax incidence on income. The chamber has said difference in accounting practices followed by different countries would lead to a double taxation on the income of an Indian taxpayer. A high level delegation led by Chairman of the ASSOCHAM National Council on Direct Taxes Mr Rajesh Garg, recently called on the CBDT Member Mrs Rani Singh Nair and had detailed discussion on the issue threadbare.
A committee was set up by CBDT to suggest the methodology for grant of Foreign Tax Credit (FTC). The committee has since submitted its report, following which the CBDT has come out with the draft rules seeking comments of the stakeholders. As per the draft Rules, Foreign Tax Credit (FTC) is allowed to the extent of the Indian tax.
Enumerating its concerns the ASSOCHAM 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. In addition there may be difference in accounting mechanism followed by different countries. For instance, 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 use, 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”.