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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Direct Tax Laws & International Taxation

Case: Vedanta Infra Ltd, an Indian resident company, earns Rs 40 lakh of business income from a project in Country X, where it paid tax of Rs 14 lakh (35%). India has a DTAA with Country X that provides credit for foreign tax. The company's average rate of Indian tax is 30%, so Indian tax on this income is Rs 12 lakh. The CFO asks about the foreign tax credit allowable in India. What is the credit?

The credit is Rs 12 lakh. Foreign tax credit cannot exceed the Indian tax payable on the same foreign income. Foreign tax paid is Rs 14 lakh, but Indian tax on that income is only Rs 12 lakh, so the lower figure is allowed and the excess is lost.

  1. ARs 12 lakhCorrect
  2. BRs 14 lakh
  3. CRs 2 lakh
  4. DRs 26 lakh

Explanation

Foreign tax credit is limited to the lower of the foreign tax paid (Rs 14 lakh) and the Indian tax on the same income (Rs 12 lakh), so it is Rs 12 lakh. Claiming the full Rs 14 lakh ignores the cap. The excess Rs 2 lakh is not refunded or carried forward.

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