Determining your tax liability in India boils down to two key factors: your residential status and where you earned your income during the financial year. According to Section 6 of the Income-tax Act, 1961, whether you're a resident or non-resident hinges on your physical presence in India during the relevant financial year.

Residents are further classified into two categories: Not Ordinarily Resident (NOR) or Ordinarily Resident (OR), based on their physical presence in India during previous financial years. This classification is crucial as it determines the extent of taxable income. For instance, an OR is liable to pay tax on their global income, whereas NOR individuals may be exempt from paying tax in India on their global income, provided certain conditions are met. Once you qualify as an OR in India, your global income becomes subject to taxation in India, regardless of where it was earned or received.

Understanding your residential status each financial year is essential for accurately assessing your tax obligations.

When someone earns money in one country but lives in another, they may face a problem called double taxation. This means they have to pay taxes on the same income in both countries. For instance, let's say someone who used to live in England now lives in India and earns rental income from a property in Italy.

Italy might tax the rental income because it's earned there. But India might also tax it because the person is a resident there, and India taxes residents on their global income. This situation of being taxed twice on the same income is called double taxation.

To solve this issue, India can make agreements with other countries. These agreements are called Double Taxation Avoidance Agreements (DTAAs). They have a section that helps avoid double taxation. It allows the person to claim the taxes paid in the country where the income was earned as a deduction from the taxes owed in India. This is known as the Foreign Tax Credit (FTC).

If there's no agreement between India and the other country, Indian tax laws still provide relief. A resident of India can still get the benefit of FTC to avoid being taxed twice.

Individual taxpayers in India can benefit from the Foreign Tax Credit (FTC) when they file their income tax return (ITR). To claim this benefit, they need to report the necessary details in Schedule FSI (foreign-sourced income) of the ITR form. However, in certain cases, the claim for FTC might undergo scrutiny, where taxpayers must provide evidence of foreign-sourced doubly taxed income and the taxes paid on it outside India. For example, if a significant FTC is claimed, the ITR might be subject to scrutiny.

To streamline this process and ensure that income tax authorities have the required documentation to verify FTC claims, the Central Board of Direct Taxes (CBDT) introduced Rule 128 through the Income-tax (Eighteenth Amendment) Rules, 2016, which became effective from April 1, 2017.

Rule 128 outlines the method for determining FTC and mandates the submission of Form 67 by taxpayers before the due date for filing their original ITR in India (typically July 31 for salaried individuals and others whose accounts are not audited). Form 67 must be accompanied by the necessary proof of taxes paid outside India on doubly taxed income.

Taxpayers need to provide proof of taxes paid abroad, like tax receipts or salary documents showing deductions, to claim a Foreign Tax Credit (FTC). In the past, people faced challenges because different countries have different tax years, making it difficult to gather necessary information and meet India's July 31 tax deadline. As a result, many filed revised Income Tax Returns (ITR) once they had the required proof from overseas.

 

However, a new Rule 128 mandates the submission of Form 67 by the original ITR deadline, usually July 31. This has led to the rejection of FTC claims in revised ITRs from the financial year 2017-18 onwards by the Central Processing Centre (CPC) of income-tax authorities. Consequently, taxpayers face tax demands.

 

Local officers have supported these rejections, citing non-compliance with Rule 128 when Form 67 is submitted after July 31. Even if taxpayers disagree with the demands on the income tax portal and resubmit proof for FTC, authorities often adjust subsequent refund claims against outstanding tax demands.

 

The CBDT, on August 18, 2022, made changes to Rule 128, addressing concerns about FTC denial in tax cases. Now, taxpayers can file Form 67 after the July 31 deadline, but before the belated ITR filing deadline (usually December 31), ensuring compliance. However, there's still confusion regarding FTC claims in revised ITRs under Section 139(5), leaving room for further disputes with tax authorities.

These ongoing issues have burdened taxpayers with prolonged legal battles and frozen funds, leading them to appeal to higher tax authorities for resolution. Unfortunately, many appeals have lingered unresolved for 2-3 years without a clear timeline from tax authorities. Taxpayers anticipate relief in the upcoming budget, hoping for:

  1. Expedited resolution of pending appeals through additional technical support and virtual hearings for quicker communication.
  2. Clarity on claiming FTC benefits in revised ITRs under Section 139(5).
  3. Fair opportunities, including virtual hearings, before adjusting refunds against subsequent year demands.
  4. Reviewing taxpayer responses by officers knowledgeable about Double Taxation Avoidance Agreements (DTAA) to ensure accuracy.
  5. Considering DTAA benefits at the TDS stage to prevent double taxation for globally mobile employees.

Implementing these measures would ease administrative burdens for both taxpayers and tax authorities, reducing litigation and ensuring smoother compliance with tax laws. It would also free up resources currently tied up in resolving these issues.