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FPIs may be allowed tax treaty benefits on dividend income
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SME Times News Bureau | 13 Jan, 2021
The Centre may propose amendment in the tax laws to allow Indian
corporates to apply tax treaty rates while withholding tax on dividends
and interest to be paid to FPIs.
The move is expected to
facilitate foreign portfolio investors (FPIs) as they will not need to
claim a tax refund for surplus taxes withheld by Indian corporates,
while filing their annual income-tax returns in India.
Sources
said the changes may be proposed in Budget 2021 and form part of the
Finance Bill that will amend the tax laws to give effect to the
proposal.
With effect from April 1, 2020, (dividend
distribution tax) DDT has been abolished and dividend has been made
taxable in the hands of shareholders at applicable rates. But while
distributing dividends to FPIs, Indian companies withhold tax at
prevailing domestic rates and pass on the balance amount to overseas
investors. FPIs then have to seek a refund of surplus tax withheld by
Indian corporates, while filing their annual income-tax returns in
India.
Present rate of DDT is at 15 per cent on gross basis plus surcharge and cess, resulting in a net tax rate of 20.56 per cent.
With
the changes that are being considered, FPIs would come at par with
other non-resident investors (e.g., FDI investors), who currently enjoy
tax treaty benefits at the withholding tax stage on their Indian-sourced
dividends and interest.
Being non-residents, FPIs can also
avail the benefits of applicable bilateral tax treaties where rates are
normally lower or the transfer is completely exempt from any tax. But
under the domestic tax law, Indian companies are not permitted to apply
lower tax rates as prescribed by a tax treaty while withholding tax on
dividends and interest to be paid to FPIs.
According to
Deloitte India, this is the reason why the domestic tax law needs to be
amended to allow Indian companies to apply tax treaty rates for
withholding tax on dividends and interest payments to FPIs, as currently
available to other non-resident investors.
Facilitating FPIs is
also expected to boost the investment climate in the country as these
investors have been very active on the Indian market throughout the
Covid pandemic keeping its momentum going. FPIs activity is one of the
reasons why Sensex is within touching distance of its historic level of
50,000 points.
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