The countdown for the Union Budget 2021 has begun, with the Finance Minister Nirmala Sitharaman scheduled to present her third budget on February 1. Ahead of the budget, research and advisory firm Taxmann has said, in its pre-Budget report, that tax deducted in a foreign country should be treated as income of the assessee.
Section 198 of the Income-tax Act, 1961 provides that the tax deducted at source is considered as gross total income of the assessee. ‘All sums deducted in accordance with the foregoing provisions of this Chapter shall, for the purpose of computing the income of an assessee, be deemed to be income received,’ Section 198(1) states.
Any tax deducted or collected under the Income-tax Act is usually deemed as income of the assessee and added to the gross total income of the assessee, under the provisions of Section 198. However, the computation of income is often disputed if taxes have been withheld outside India and the corresponding income is offered for taxation in India as Section 198 does not specifically mention taxes that may be withheld outside India.
As the taxes paid outside India are eligible for the foreign tax credit under Section 90/90A read with Rule 128, Taxmann has recommended that the government should make necessary amendments to Section 198 so as to treat income earned outside India at par with income earned within the country.