Some time in the early 21st century, Infosys co-founder and then CEO Nandan Nilekani spoke about the growing phenomenon of globalisation, and captured the sentiment in what would later be viewed as prophetic words — ‘the world is flat’, which also inspired Thomas Friedman to choose this as the title of his next bestseller.
Nearly two decades later, the world continues to emerge flatter. A growing number of people now work in more than one country, earn there, and sometimes pay taxes in different continents. And to avoid taxpayers paying double taxes, there are multi-lateral agreements which enable citizens to claim credit for the taxes paid in one country, and avail them while filing taxes in their home country.
In India, this is known as the Double Taxation Avoidance Agreement (DTAA) which means when an Indian resident earns an income abroad and pays taxes there, then they can claim the credit at the time of filing income tax (ITR) return here.
However, one needs to apply in a prescribed format and within a stipulated time frame – failing which the credit sought may get rejected. Although it sounds unfair and is devoid of natural justice, but it can happen as in the case of film actor Sonakshi Sinha.
Let us find more on this:
The actor’s income tax return for the year 2017-18 was under question and as per the rules that existed then, she was supposed to submit form 67 at the time or before the filing of taxes. She filed her tax return in September 2018. But the tax credit was claimed nearly 16 months later in January 2020. Consequently, the request of claiming credit for taxes paid in the UK was turned down.
Later, the tax officer’s discretion was challenged in the tax tribunal (a quasi-judicial body dealing in tax matters) and later in the appellate tribunal which subsequently gave the verdict in the actor’s favour on the ground that submitting the form was a mere ‘procedural’ formality. The credit can not be denied for not submitting a form within a time frame.
So, what are the lessons we can learn from this episode.
We can learn the following lessons:
1. Do not assume that merely by paying taxes abroad, you are certain to receive credit for it. There is a procedure that needs to be followed and some deadlines that must to be met.
2. It is imperative to first assess whether the taxes paid in overseas territory are eligible for tax credit. “One has to first check if the taxes paid are eligible for tax exemption or not according to the DTAA provisions. Certain taxes are not eligible,” chartered accountant Chirag Chauhan told MintGenie.
3. The rules were recently amended by the Central Board of Direct Taxes (CBDT) and tax payers are now supposed to file the form 67 before the end of the relevant assessment year to be able to claim tax credit.
4. Despite the change of rules, it is recommended to submit the form as soon as one can. It is better than the previous rule which mandated the form to be submitted before or at the time of filing taxes. However, it is worth noting that even after the change of rule, some people can miss the deadline as in the case of actor Sinha.
5. Paying income tax and filing tax returns are related, but two different, things. So, even after paying the taxes in one territory, it is pertinent to file the return in your country of residence i.e., India.
So, one should not just assume that claiming credit will happen automatically. One needs to apply to claim it.