Foreign Tax Credit (FTC) prevents double taxation on income earned abroad and taxed in India. Governed by Sections 90, 91, and Rule 128 of the Income Tax Act, 1961, it requires adherence to timelines and documentation, including mandatory filing of Form 67. Non-compliance or concealment of foreign income can have severe consequences, including penal taxation under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, and other provisions of the Income Tax Act.
Statutory Framework for FTC
Section 90: DTAA Provisions
- Provides tax relief under Double Taxation Avoidance Agreements (DTAA).
- Two methods:
- Exemption Method: Excludes foreign income from Indian taxation.
- Credit Method: Allows FTC against Indian tax liability on doubly taxed income.
Section 91: Unilateral Relief
- Applies when no DTAA exists.
- Offers relief for taxes paid on foreign income taxed in India, provided taxes are non-refundable abroad.
Rule 128: FTC Computation and Documentation
- Specifies conditions and procedures for claiming FTC, including mandatory filing of Form 67 with proof of foreign taxes paid.
- FTC is limited to the lower of:
- Foreign tax paid.
- Indian tax liability on the same income.
Circular No. 9/2017
- Clarifies that Form 67 must be filed before the due date for filing Income Tax Returns (ITR).
Consequences of Non-Disclosure of Foreign Income
Undisclosed Foreign Income and Assets (UFIA)
- Non-disclosure of foreign income or assets results in severe penalties under the Black Money Act and Income Tax Act.
| Particulars | Consequences |
|---|
| After 31st December 2024 | Treated as undisclosed income under the Income Tax Act or UFIA provisions. |
| Tax Rate on Undisclosed Income | Taxed at 75% of the total undisclosed income. |
| Penalty | Additional penalty of 10% of undisclosed income under Section 271AAC. |
| Prosecution | Imprisonment ranging from 3 months to 10 years under Section 276C of the Income Tax Act. |
Conditions for FTC Claim
- Dual Taxation: Income taxed in both India and the foreign jurisdiction.
- Non-refundable Foreign Taxes: FTC is allowed only for taxes not refunded abroad.
- Limit on FTC:
- Lower of foreign tax paid or Indian tax liability on the same income.
- Income Disclosure: Foreign income must be included in the total income in the Indian tax return.
- Form 67 Filing: Mandatory before ITR filing due date.
Procedure for FTC and Form 67 Filing
| Step | Details |
|---|
| Login to Portal | Access the Income Tax e-filing website with PAN credentials. |
| Access Form 67 | Navigate to "Form 67" under the "E-File" menu. |
| Enter Details | Provide taxpayer details, foreign income, tax paid, and DTAA provisions (if applicable). |
| Upload Proof | Attach foreign tax payment receipts, tax returns filed abroad, and proof of income. |
| Submit Form 67 | File electronically before ITR filing to validate FTC claims. |
| File ITR | Ensure Form 67 is filed and acknowledged before filing the income tax return. |
FTC Illustration
| Country | Income Earned (₹) | Foreign Tax Paid (₹) | Indian Tax Liability (₹) | FTC Claimed (₹) | Net Tax Payable in India (₹) |
|---|
| Germany | ₹50,00,000 | ₹8,00,000 | ₹12,00,000 | ₹8,00,000 | ₹4,00,000 |
| Canada | ₹60,00,000 | ₹9,00,000 | ₹12,00,000 | ₹9,00,000 | ₹3,00,000 |
Delays in Filing Form 67 and Case Laws
- Rule 128: Filing Form 67 by the ITR due date is mandatory.
- Case Laws Allowing FTC Despite Delay:
- Sanofi India Ltd. v. Dy. CIT (2023): Procedural delay in Form 67 filing did not negate genuine FTC claims.
- Wipro Ltd. v. CIT (2022): Substantive compliance allowed despite minor procedural lapses.
- Bhaskar D. Kolhe v. ITO (2021): FTC granted as taxes were genuinely paid, despite delay in Form 67 submission.
- Tata Steel Ltd. v. CIT (2021): Recognized exceptions for procedural delays if adequately justified.
Timeline for FTC Compliance
| Activity | Timeline |
|---|
| Income Earning | During the financial year (April to March). |
| Foreign Tax Payment | As per foreign jurisdiction's tax regulations. |
| Form 67 Filing | On or before the ITR due date (31st July for individuals). |
| ITR Filing | Post Form 67 submission. |
| Disclosure of Income | Before 31st December 2024 to avoid penal consequences. |
Conclusion
Foreign Tax Credit (FTC) is a vital relief mechanism for taxpayers with global income. Adherence to procedural requirements, timely filing of Form 67, and full disclosure of foreign income are crucial to avoid harsh penalties. While judicial precedents allow leniency for genuine cases of procedural delay, non-disclosure of foreign income attracts severe consequences, including a 75% tax rate, penalties, and possible prosecution. Ensuring compliance with statutory provisions and maintaining robust documentation is essential for seamless FTC claims and avoiding adverse legal outcomes.
