MUMBAI: The Ministry of Finance was quick to notice that some taxpayers were not including the taxes withheld outside India, for the purpose of calculating their total income. This in turn, led to under reporting of income. These individuals offered the overseas income net of tax and at the same time claimed a foreign tax credit (FTC) for taxes withheld overseas against their India tax liability.In short – they got a double advantage.
The budget proposes to amend section 198 of the Income-tax (I-T) Act, to include income taxes paid outside India for the purpose of computing the income of the taxpayer who is liable to tax in India. This proposal will be effective from financial year 2024-25.
Parizad Sirwalla, partner and head (Global Mobility Services Tax) at KPMG India said, “The amendment is more clarificatory in nature. This was always the correct position. As explained in the Explanatory Memorandum, It appears that some taxpayers (including companies) were not doing so and hence this amendment was introduced making it abundantly clear. “
She gives an illustration. An Indian employee of an Indian subsidiary of a German Co, was granted shares under the global ESOP Plan. He was eligible to receive dividend of Euro 100 on such shares. As per German law, Euro 10 was withheld and the balance was transferred to the employee’s Indian bank account.
“The correct tax position was always to offer the entire Euro 100 as income and claim Euro 10 as a double tax relief (credit against Indian tax liability on such Euro 100),” Sirwalla explained.
Ameya Kunte, founder, Globeview Advisors points out a few decisions where overseas tax was not held part of the total income assessable to tax in India – these now stand overturned, “The MP high court in the case of Yawar Rashid had held that the tax deducted at source outside India from foreign dividends and interest income was not part of the total income and thus not assessable in the hands of the taxpayer. This high court decision was also relied upon by the Bangalore bench of the Income-tax Appellate Tribunal in the case of Sunil Shinde. The proposed amendment makes it clear tax deducted at source outside India, will be part of income. The taxpayer can claim a foreign tax credit against the Indian taxes due on the overseas income.
The budget proposes to amend section 198 of the Income-tax (I-T) Act, to include income taxes paid outside India for the purpose of computing the income of the taxpayer who is liable to tax in India. This proposal will be effective from financial year 2024-25.
Parizad Sirwalla, partner and head (Global Mobility Services Tax) at KPMG India said, “The amendment is more clarificatory in nature. This was always the correct position. As explained in the Explanatory Memorandum, It appears that some taxpayers (including companies) were not doing so and hence this amendment was introduced making it abundantly clear. “
She gives an illustration. An Indian employee of an Indian subsidiary of a German Co, was granted shares under the global ESOP Plan. He was eligible to receive dividend of Euro 100 on such shares. As per German law, Euro 10 was withheld and the balance was transferred to the employee’s Indian bank account.
“The correct tax position was always to offer the entire Euro 100 as income and claim Euro 10 as a double tax relief (credit against Indian tax liability on such Euro 100),” Sirwalla explained.
Ameya Kunte, founder, Globeview Advisors points out a few decisions where overseas tax was not held part of the total income assessable to tax in India – these now stand overturned, “The MP high court in the case of Yawar Rashid had held that the tax deducted at source outside India from foreign dividends and interest income was not part of the total income and thus not assessable in the hands of the taxpayer. This high court decision was also relied upon by the Bangalore bench of the Income-tax Appellate Tribunal in the case of Sunil Shinde. The proposed amendment makes it clear tax deducted at source outside India, will be part of income. The taxpayer can claim a foreign tax credit against the Indian taxes due on the overseas income.
