The Hindu Business Line : Tax sops sought for dividend from foreign subsidiaries

INDIA Inc has sought rationalisation of taxation on dividend received from a foreign subsidiary to promote India as a favourable investment destination.

"It is a well-known fact that outbound investment from India is on the increase with many domestic companies setting up subsidiaries abroad. Normally, dividend should flow back to the parent company in India as and when declared," a Federation of Indian Chambers of Commerce and Industry (FICCI) official said.

Talking to Business Line, the FICCI official said, "The dividends are, however, flowing to lesser tax jurisdictions where holding companies are being set up. The income in such jurisdictions accumulates and may be remitted to India at a later date. This is happening due to the fact that dividend paid by a foreign company to an Indian company is suffering double taxation."

Elaborating on how the companies are suffering double taxation, the FICCI official said, "to begin with, the dividend is paid out of profits on which corporate tax is generally paid by the foreign company as per the laws prevailing in that country. Secondly, the tax is withheld on dividends distributed by the foreign company as per the tax laws prevailing in that country."

Further, the dividend income received by the Indian company is taxed at the rate of 35 per cent plus surcharge for the reason that tax exemption available under the Income-Tax Act is not applicable in respect of foreign sourced dividend income as Indian distribution tax has not been paid on it, FICCI said.

"While determining the Indian tax liability on such dividend income, credit is given for tax withheld in foreign country on such dividend income and the Indian company pays additional tax liability," the official said adding "therefore, it becomes imperative to relieve the double taxation on foreign sourced dividend income for inducing foreign subsidiaries to flow back the dividends to India and increases the competitiveness of Indian companies."

To avoid this situation, the Government may either consider extending the exemption available under Section 10(33) of the Income-Tax Act to dividend income received from foreign companies or, a mechanism known as the allowance of underlying tax credit for the stream of dividend income be adopted.

"Either of the aforesaid alternatives will help in providing relief from double taxation in respect of foreign sourced dividend distribution received by the Indian companies," the FICCI official said. In fact, the chamber has represented to the Central Board of Direct Taxes (CBDT) on the same issue.

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