Practical hurdles to credit of foreign tax

G. KARTHIKEYAN | Updated on November 27, 2011

This automation anomaly, despite the double taxation avoidance agreement, leaves a bad impression.


The Online Tax Accounting System in India doesn't recognise the foreign taxes paid in a different country.

Ranjan Gupta had to file his India tax return that included his UK income after a short deputation to London on a company assignment. Ranjan stayed in UK for 4 months during the financial year, and the balance in India, thereby becoming a resident in India. He was paid salary in UK by the parent company during his deputation, and tax was accordingly deducted there.

As a resident, the global income must be offered to tax in India, though he is entitled to avail tax credit on the India return for the foreign income taxes paid in UK. This is perfectly in tune with the double taxation treaty between India and UK. So, what is the challenge now?


The Income Tax department, in recent years, started processing the tax returns through its integrated software for all the returns filed by the taxpayers. The way this software is designed, it accepts the total income of the taxpayer as declared on the tax return; however, it does not recognise the foreign taxes paid in a different country. The tax payer is given credit towards his tax payable only if it is reflected in the Online Tax Accounting System, to be approved by the Assessing officer. It has provisions only for advance tax, TDS or self-assessment tax. In view of this, the practical situation is that whenever such returns have been filed, including global income and taking a credit for foreign taxes against the tax payable, the tax payer ends up receiving a demand notice from the Tax department, as the software doesn't find a match for the foreign tax credit.

Subsequently, the tax payer has to undergo the rigorous process hassle of filing a rectification petition under Section 154 of the Income Tax Act, to validate the situation.

Ranjan Gupta's is not a unique case, but applicable to several software professionals who are deputed to various countries for a part of the year, and who are paid in foreign countries during their stay there.

Many employees are deputed under L-1 Visa or H 1 B Visa for a shorter duration, for a specific assignment to US destinations. The salary is paid by the parent or subsidiary company in the respective country, for which tax is withheld in the respective country for that particular portion of the salary.

These tax payers need to file the India tax return, including their global income if he or she stays more than 182 days in India, and claim credit for the foreign taxes paid.


The situation looks worse when a foreign national is deputed for longer assignments in India, and becomes a resident in India for a particular year. He needs to declare global income in India and avail the foreign tax credit for the foreign portion of withheld taxes.

The glitch makes it difficult to get the right credit for the taxes paid in total and also puts the tax payer through a convoluted procedure of filing a corrective reply to the IT department's initial demand notice, and explaining the details of the peculiar situation.

While the automation initiatives of the Income Tax department in India are laudable, anomalies of this kind leave a bad impression in the minds of global trotters, especially non-resident tax payers.

Though the paper return forms have a column for the claim of foreign tax credit, the tax software matches only the bank information available in terms of TDS / Advance tax / Self-assessment tax. A way must be found out of this impasse, since the credit for foreign taxes forms the backbone of the double taxation avoidance agreements that India has with various countries.

(The author is a Coimbatore-based chartered accountant.)

Published on November 27, 2011

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