New Dividend tax in India may impact foreign companies
By Raghu Marwah and Anjali Kukreja, R.N. Marwah & Co LLP
1. Introduction of new law and its amendment
Before the insertion of section 115BBDA, there was loss to revenue, as high dividend income recipients (individual, HUF or firm) who would have been taxed at 30% had their tax liability discharged through DDT in the hands of the company at around 15%. Hence, to plug this loss of revenue, the Finance Bill 2016 inserted section 115BBDA into the Income Tax Act 1961 (hereafter the ‘Act’) with effect from 1 April 2017.
Section 115BBDA provides that any income by way of dividend in excess of INR 1 million (equivalent to USD 14,705) shall be chargeable to tax in the hands of shareholders, being individual, resident and HUF residents in India, at the rate of ten percent. The Finance Act 2017 amended section 115BBDA to extend its applicability to all resident assessees, except domestic companies and certain funds, trusts, institutions, etc.
2. Analysis of applicability
A foreign company that is deemed to be a resident of India by virtue of Place of Effective Management (POEM) provisions is subjected to Section 115BBDA, being a resident assessee other than the excluded category (i.e. domestic company and certain funds, trusts, institutions, etc).
3. Practical scenario
Practically, the application of Section 115BBDA to a foreign company cannot be suo motu. Such a situation may arise generally after a prolonged litigation between the foreign company and the revenue authorities, where the assessee is not able to discharge its onus in establishing that the POEM of the foreign company is outside India. In this scenario, the revenue authorities would also require to initiate demand under Section 115BBDA if conditions are met, and tax litigation may ensue as a consequence.
4. Availability of tax credit
In the event of dividend being subjected to section 115-O, the dividend is taxfree in the hands of the recipient of the dividend under section 10(34) of the Act. In the context of the dividend covered under the provisions of section 115BBDA of the Act, the dividend is taxable in the hands of the recipient as specified under the proviso to section 10(34) of the Act. Under section 115BBDA, the recipient of the dividend is the person liable to pay tax and discharges such tax liability and hence, to be entitled to tax credit under tax treaty provisions as a tax resident.
5. Concluding views
The above analysis is indicative that, although invoking a tax demand on a foreign company deemed to be a tax resident of India by virtue of POEM may or may not have been an envisaged scenario at the time of the drafting of the provisions of section 115BBDA, it surely is along the lines of the recent government endeavours to curb tax avoidance practices. This intended or unintended tax net on foreign companies helps in curbing tax avoidance practices, as it penalises foreign companies incorporated outside India by Indian residents, thereby it is along the lines of the BEPS action plans and recently introduced GAAR provisions.
Raghu MarwahR.N. Marwah & Co LLP, Bangalore, New Delhi, India
T: +91 114 319 20 00
Anjali KukrejaR.N. Marwah & Co LLP, Bangalore, New Delhi, India
T: +91 114 319 20 00
The Authors are expert in the field of International Tax and specialize in family office advisory, especially targeted towards India-UK Investments.
Published: July 2018 l Photo: Kriangkrai - Fotolia.com