State income taxes in the USA and Canada are eligible for foreign tax credit under section 91 of the Income-tax Act despite, DTAA allows only Federal Tax

Assessee covered by DTAA will be eligible for credit of State taxes u/s 91 despite DTAA not providing for the same

Current Scenario

1) The India-US tax treaty (DTAA) provides for the credit of the Federal income taxes only.

2) This is allowed under Section 90 of Income tax act.

3) In terms of the India-US and India-Canada tax treaties, the payment of State income taxes in the USA and Canada are not taken into account for granting foreign tax credit, as only federal income tax is eligible for tax credit.

4) Further, these taxes are not allowed deduction under section 37(1) of the Act as these are in the nature of taxes on income.

 

ITAT obesrved that:

1) Section 91 of the Act provides credit of foreign taxes paid “in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation”

2) Explanation 1 to Section 40 (a)(ii) of the Act inserted by the Finance Act 2006 clarifies that amount eligible for double taxation avoidance relief would always be deemed to be part of tax on profits and therefore disallowable.

3) Section 2(43) of the Act states that “tax” in relation to AY 1965-66 and subsequent years means income-tax chargeable under the provisions of Act.

4) Tax credit provisions under Indian Income Tax Act are more beneficial to the taxpayer vis-à-vis the tax credit provisions in related tax treaties as the provisions does not discriminate between State and Federal taxes, and in effect provides for both these types of income taxes to be taken into account for the purpose of tax credits against Indian income-tax liability.

5) However, the India-US tax treaty provides for the credit of the Federal income taxes only.

6) While the title of section 91 of Indian Income Tax suggests that it is applicable only in cases where India has not entered into a double taxation avoidance agreement with the respective jurisdiction, but the scheme of section 91, read along with section 90, does not reflect any such limitation. Section 91 is, thus, required to be treated as general in application.

7) The fact that a taxpayer is entitled to make a particular claim, in accordance with a tax treaty provisions, does not disentitle him to make the claim in accordance with the provisions of the Act if it is more beneficial to him.

 

Conclusion

The Mumbai bench of Income-tax Appellate Tribunal (the Tribunal) in this case held that US federal tax and state tax paid in respect of income earned overseas are not deductible as expenditure incurred for earning income under section 37 of the Income-tax Act, 1961 (the Act).
Further, the Tribunal observed that, though relief is not available for state income taxes paid under the India- US tax treaty (tax treaty), the relief is available under Section 91 read with Section 90 of the Act

Reference :Tata Sons Limited vs. DCIT (ITAT No: 4978/Mum/04)

 

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6 Responses to State income taxes in the USA and Canada are eligible for foreign tax credit under section 91 of the Income-tax Act despite, DTAA allows only Federal Tax

  1. s das says:

    Dear Mr gupta
    Thank you very much for this information. I have us salary income in 2014 for 2 months. I understand that I can claim relief for tax credits for both federal and state under section 90 and 91 respectvely, and only pay any additional tax after that. Could you kindly confirm?
    Thanks again for this very useful reference.
    Regards.

  2. TJ says:

    Nice Article!!

    Need some suggestion on the tax relief under section 90 of Income Tax.
    I was deputated in USA during the period of Jan-2014 till Aug-2014. During this period my salary (indian salary converted to $) plus living allowances gets credited to US bank account. I paid all the taxes (federal, social security, state taxes) in US using W-2. When I returned to India in Sep-2014, my employer deducts the tax on the salary computed during that deputation period (Apr-14 to Aug-2014) which results in 0 net salary – which means I paid the tax on salary in USA as well as in India (which is not even credited in my indian account). So my question while filling for tax relief under DTAA in ITR at India:
    1. Shall I include both salary plus living allowance (during Apr-2014 to Aug-2014) as Income from Outside India or only salary (as I read that living allownace is extempt from tax) under FSI. Please note that salary is credited in USA account not indian account.

    2. Only federal tax can be considered as tax paid for relief or all taxes (federal, social security, state taxes). If yes then how to calculate US tax for financial year (Apr-14 to Mar-15) as US financial year starts on January.

    Please suggest.

  3. Venu says:

    Please let me know if I can include the social security tax and medicare tax also under section 91?

    Ultimately, I have already paid these taxes and I think I should get relief for same in India.

    Regards,
    Venu

  4. Amol says:

    Hi, we can get exempt from social security tax and medicare tax as per this high court judgement?

    http://www.kpmg.com/IN/en/services/Tax/FlashNews/Yoshio-Kubo-and-others.pdf

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