Introduction of foreign tax credit carryforward will give competitive edge to Indian firms in global market

The government is focused on making Indian companies more competitive in global market, attract investments from outside the country, promote startups, introduce ‘Make in India’ campaign along with rationalisation of tax without any leakage of revenue to meet fiscal deficit targets.

Thus, there has always been a need to maintain right balance between benefits provided to companies to make it more competitive and effective collection of taxes. The finance minister in his budget speech of 2015 mentioned that basic rate of corporate tax in India at 30 percent is higher than the rates prevalent in the other major Asian economies, making our domestic industry uncompetitive.

Representational image. News 18.

Representational image. News 18.

Though it has been believed that the budget 2019 being an interim budget may not have major changes, the finance minister recently gave a strong indication that it may not necessarily be a vote-on-account, emphasising that the government could deviate from an election year convention to meet challenges before the economy.

Therefore, considering the same, budget 2019 is expected to rationlise legitimate benefit available to companies in the form of set off of losses and claim of foreign taxes paid to make Indian companies more competitive. It is expected to introduce the concept of carryback of losses and carryforward of foreign tax credit in the current budget proposal.

Currently, the Income Tax Act provides for set off of loss of a particular tax year in subsequent eight years through a mechanism often referred as carryforward of losses. However, the concept of carryback of loss provides businesses with the choice to carry back tax loss of current tax year to be offset against profit of earlier years.

This can result in increased cash flow and provide a competitive advantage to Indian companies in the global market. Also, internationally such provisions relating to carry back of business losses are prevalent in many developed countries like United States of America, Singapore and the United Kingdom.


Further, another expectation from the budget 2019 is providing carryforward of foreign tax credit paid on income earned overseas. Currently, the Income Tax Act allows set off of foreign tax credit in respect of foreign taxes paid on overseas income only in case where taxes are payable in a year. However, in case of loss/inadequate profits, no set off may be possible and foreign tax credit in such a scenario shall lapse.

Thus, though foreign income has been offered to tax on which taxes has been paid, no refund is granted or such amount is not allowed to be carried forward. It is expected that the budget 2019 shall provide for carryforward of such unutilised foreign tax credit to be set-off against taxes payable in future years. Many countries such as the US and Germany allow carryforward of Foreign tax credit.

The government has taken radical steps such as implementation of Base Erosion and Profit Shifting (BEPS), General Anti-avoidance Regulation (GAAR) and Place of Effective Management (POEM) to align Indian tax law with internationally adopted tax practices. The above proposed measures to rationalise tax shall be a step forward in that direction along with making India more competitive globally.

(Yogesh Shah is partner with Deloitte Haskins & Sells LLP and Kinjesh Thakkar is manager with Deloitte Haskins & Sells LLP)

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Updated Date: Jan 24, 2019 12:04:36 IST

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