Shah Rukh Khan's Tax Case: What Are Foreign Tax Credit Rules In India

Bollywood Actor Shah Rukh Khan recently won a big case against the Indian tax authorities. The Income Tax Appellate Tribunal (ITAT) ruled in the actor’s favour by dismissing his reassessment proceedings for the financial year (FY) 2011-12. While this could have been just another celebrity tax dispute, the lessons we can learn from this case are important for Indian taxpayers earning an income abroad.

So, what happened in SRK’s case? What does it tell us about how foreign income is taxed in India? Let’s understand these points in detail which make sense for everyone, and not just tax experts.

SRK V/s the Taxman: What Went Wrong?

The Indian tax officials also keep an eye on citizens who earn money overseas, and even one of the three King Khans wasn’t immune to this scrutiny. The tax authorities decided to reassess SRK’s income for 2011-12. According to some media reports, this dispute was related to the taxation of Khan’s remuneration for the movie Ra.One (released in 2011).

In its case, the tax official denied his ‘foreign tax credit’ (FTC) for taxes paid in the United Kingdom, thereby increasing his taxable income to around Rs 84.17 crore. The dispute was related to 70 per cent of his pay being routed through UK-based Winford Productions as around 70 per cent of the film was shot in Britain. The taxman’s argument was that this has resulted in a ‘revenue loss’ for India, thereby disallowing his FTC claim.

However, the ITAT has shut the tax official’s case, saying there were no valid reasons for a reassessment.

How Is Foreign Income Taxed in India?

If you are an Indian resident earning abroad, you need to understand how your income is taxed. India follows a system where residents are taxed on their global income, while non-residents are only taxed on the income they earn in India.

Here residential status plays a key role. For instance;

• If you have stayed in India for 182 days or more in a financial year, you are considered a resident.

• If you’ve stayed for 60 days in the last financial year and 365 days in the previous four years, you are also a resident.

Once you qualify as a resident, you must declare and pay taxes on all income, whether earned in India or overseas.

Foreign Tax Credit: How To Avoid Double Taxation?

A major concern for people who earn abroad is the risk of paying taxes twice - once in a foreign country and again in India. However, the provision of FTC prevents this. Here how;

FTC allows taxpayers to offset the tax they have already paid abroad against their tax liability in India. Taxpayers should know that this comes with some key conditions:

• You can only claim FTC in the year the foreign income is taxed in India

• You have to submit Form 67 before filing your income tax return

• The credit is limited to the lower amount between the tax paid abroad and the tax payable in India on the income.

India has signed the Double Tax Avoidance Agreements (DTAAs) with most countries and limited agreements with eight nations. This treaty allows people who earn income abroad to avoid paying double taxes.

If you want to claim benefits under the DTAA, you need a ‘Tax residency Certificate’ from the country where you earned the income. This document proves that you are a taxpayer in that country, making it easier to get tax relief in India.

SRK’s Case: Lessons To Learn

The ITAT ruling in Khan’s case sets a strong precedent as it signals that tax officials cannot arbitrarily reopen tax assessments without having valid reasons. It also highlights the importance of proper documentation when dealing with foreign income.

If you are Indian taxpayers earning any income abroad, the case is a reminder to;

• Understand residential status and its impact on your tax liability

• File Form 67 on time to claim a foreign tax credit

• Also you should keep records of foreign income, tax payments, and TRC for smooth tax filing.