INSIGHT: India Returns to the Conventional Regime of Taxation of Dividends

The existing regime of taxation of dividend in India is provided in Section 115-O of the Indian Income Tax Act, 1961 (the Act), which is a special provision for the levy of additional income tax on such distributed profits, commonly referred to as dividend distribution tax (DDT), on the amount of dividends declared or distributed or paid by the Indian company. The dividend received is consequently treated as exempt in the hands of the recipient shareholder.

The existing regime of taxation of dividends has led to a debate as to whether the lower rate as provided in the Double Taxation Avoidance Agreement (the treaty) could be applied for taxation of dividends paid by an Indian company to nonresident shareholders.

The DDT, under the present law, has been treated by the Indian Revenue Service (IRS) as the tax imposed in the hands of the Indian company paying dividends and not a liability of the nonresident shareholder, and for that reason the benefit of tax treaty is denied by the tax authorities in India.

The existing regime of taxation of dividends is an obstruction for foreign investors, who in most countries are not able to claim credit for the tax paid on dividends in India.

To read the complete article, click at Download Newsletter.

Article by: Mr. Neeraj Jain and Ms. Shaily Gupta

INSIGHT : India-Nonresidents Exempt from Filing Income Tax Return

The requirement to file a tax return in India is provided under Section 139(1) of the Indian Income-tax Act, 1961 (the Act), whereby all companies are required to furnish an income tax return irrespective whether the income earned by them (which has territorial nexus with India) is chargeable to tax in India or not (see Castlet on Investment Ltd and XYZ/ABC Equity Fund for such obligation on foreign companies).

Section 115A(5) of the Act provides relief to nonresident taxpayers who derive dividend and/or interest income from the requirement to furnish a tax return in India, subject to the condition that the tax has been with-held by the Indian payer in terms of the provisions of the Act.

At present, no such exemption is available to nonresidents deriving income by way of ‘‘royalty’’ or ‘‘fees for technical services’’ (FTS), subject to tax in India under clause (b) of sub-section (1) of Section 115A of the Act. In the Finance Bill, 2020, which was tabled in the Lower House of the Parliament on February 1, 2020, provisions of Section 115A of the Act are proposed to be amended to extend the exemption from the requirement to furnish tax returns in India to nonresidents deriving income by way of royalty or FTS, where tax has been withheld at source.

To read the article please click at the Download Newsletter.