India’s multinational companies like TCS, Wipro, Infosys, Tata Motors or some of the pharmaceutical giants will now be subject to the usual corporate tax rate of between 22 per cent to 30 per cent from next year against the current concessional tax rate of 15 per cent on the dividend they receive from their foreign subsidiaries where they hold 26 percent or more stake.

The Budget documents say those companies that hold 26 percent or more stake in foreign subsidiaries will no longer enjoy a concessional tax rate of 15 percent as it will be aligned with the rate of tax that domestic investors pay on receiving dividends.

“Withdrawal of the concessional rate of taxation on dividend income from foreign companies will result in increase in tax liability for the Indian company. Companies which declare dividends within a specified period will however be able to continue to claim deduction for these dividends and will have no impact,” said Suresh Swamy, Partner, Price Waterhouse & Co LLP.

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The budget documents say that concessional tax rate was being discontinued “To provide parity in the tax treatment in case of dividends received by Indian companies from specified foreign companies vis-a-vis dividend received from domestic companies.”

However, experts say that there is an escape route for companies from this amendment. If the dividend is declared by the foreign companies and received by the domestic company at least one month prior to the date of furnishing the returns of income by the Indian company, then they can still claim concessional rate of tax on the said dividend.

“This will not have much impact due section 80M of income tax act. If the dividend earned by an Indian company from the foreign subsidiary is redistributed to shareholders here then they won’t be subject to any tax. This is since dividend in India is taxed in the hands of shareholders and not the one paying it. But foreign subsidiaries will start paying dividends more often,” said Kishor Ostwal, MD, CNI Global Research.

The government had changed the tax regime on dividends a couple of years ago.

Earlier, the company that paid the dividend had to deduct 20 per cent tax and distribute it. Now, it is taxed in the hands of shareholders and is collected from individuals in accordance with applicable tax rates in various slabs with the highest rate going up to 30 per cent.

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