For taxation purposes, some countries, such as the United States consider their citizens and green card holders as tax residents at all times, irrespective of their physical presence. In scenarios where an individual qualifies as an ROR in India and also as a resident in a foreign country under both nations’ domestic tax laws, their foreign income is often subject to tax in both jurisdictions.
This dual taxation of income earned or received abroad has long been a contentious issue, with many viewing it as an undue financial burden. To mitigate the impact of such double taxation, taxpayers may claim credit for foreign taxes paid against their Indian tax liability under the Double Taxation Avoidance Agreement (DTAA) between India and the respective foreign country.
Current ITR filing process cumbersome for such taxpayers
The due date for filing an Income Tax Return (ITR) for individuals in India is July 31 of the relevant Assessment Year (AY), while the deadline for filing a revised return is December 31 of the same AY. However, resident taxpayers face significant challenges when reporting foreign income and claiming credit for foreign taxes paid due to disparities between India’s tax system and those of other countries.
· Disparity in tax years: While most countries, such as the United States, United Kingdom, Australia, Canada, Netherlands and Germany follow the calendar year (January to December) as their tax year, India operates on a fiscal year (April to March). This mismatch creates discrepancies in the income and taxes declared in the respective countries, often affecting the tax burden in India.
Restricted timeline for revising returns: Since FY 2021-22, taxpayers can revise their India ITR only until December 31 of the relevant AY. However, many foreign countries have tax return deadlines much later in the year. As a result, individuals often cannot update their Indian ITR to reflect the final foreign income and taxes paid, which are determined after filing the foreign tax return.
Mismatch in Foreign Tax Credit (FTC): When filing their India ITR, RORs have to report their global income and claim FTC based on available foreign pay slips. However, discrepancies often arise when the final figures of taxable income and taxes paid abroad differ from the initial estimates. For instance, if additional deductions are claimed in the foreign tax return, leading to a refund of taxes paid, the FTC claimed in the Indian ITR may exceed the actual foreign taxes paid. This results in the disallowance of FTC during ITR processing, leading to additional tax liability, penalties, and scrutiny assessments.
· Financial and legal implications: In such cases, resident taxpayers may be forced to file an updated return after December 31 to reflect accurate foreign income and FTC. However, filing an updated return requires paying an additional tax of 25 percent or 50 percent, imposing an unreasonable financial burden. This is particularly unfair to individuals who filed their original returns with the most accurate information available at the time.
Grant more time to residents with foreign income
The challenges outlined underscore the need for the Indian government to consider revising the timelines for filing revised tax returns. Granting additional time to residents who report foreign income and FTC would allow them to align their Indian ITR with the final amounts from their foreign tax returns. This adjustment would ensure accurate reporting of foreign income and FTC, reducing discrepancies and avoiding unnecessary financial burdens.
Such a measure would not only spare taxpayers from unnecessary costs and litigation but also save time and resources for the Income Tax Department by minimising disputes. A tax regime that is responsive to the needs and challenges of taxpayers, simple to navigate, and adaptable to evolving global complexities will not only build trust but also broaden the tax base and enhance revenue inflows.
Considering the challenges faced by resident taxpayers in claiming FTC, it is anticipated that Budget 2025 will address these issues. By providing extended timelines and tailored solutions for taxpayers with foreign income, the government can foster a fair and efficient tax compliance system, ultimately benefiting both taxpayers and the tax department.