Govt may extend tax holiday on dividends earned overseas

Feb 11 2013, 13:52 IST
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SummaryGovt hopes that the move would encourage corporates to plough funds back into the country

To ensure foreign exchange inflows stay healthy, the government is likely to extend a tax holiday on dividends received from investments made abroad for one more year.

An official source told The Indian Express the finance ministry will “continue with the reduced 15 per cent tax on the dividends received by companies from overseas companies where they have a shareholding of above 26 per cent”. The changes will be made as part of the budget proposals for 2013-14, the source said.

Companies have not been very keen to plough back the profit earned overseas into the country as they already pay a tax on income abroad. Taxing the same in India would tantamount to double taxation. Further, the rate of taxation is also very high, discouraging them to repatriate the money. The rates abroad are as per tax treaties or that applicable for domestic jurisdiction.

“Corporate India has become global only recently. If the government wants to encourage companies to plough back profit back into the country, the necessity is that overseas dividend should not be liable to tax in India on the same lines as the domestic companies,” Dinesh Kanabar, chairman tax, India operations, KPMG, said.

He said that most companies, especially in the software sector are earning huge income overseas and have the ability to bring investment in the country. However, a high tax on such income acts as a deterrent. “The overseas dividend should be treated on a par with domestic dividend,” Kanabar said.

The government has been trying to encourage companies to invest in the country for capital formation. Also, given the din over the generation of perceived black money, and its inability to bring in voluntary disclosure of income scheme (VDIS), the government is looking at more acceptable ways to bring such income back into the country.

According to the official, a relaxation in dividend tax rates would encourage companies, which use tax havens for routing black money, to plough back their income legally into the country.

Under Section 115BBD of the Income Tax Act, dividends received by an Indian company from a specified foreign company are taxed at the rate of 15 per cent if such dividend is included in the total income for the financial year 2012-13. Earlier, the rate was 30 per cent and it was slashed to 15 per cent to encourage repatriation of income.

M Lakshminarayanan, managing partner, Deloitte, said that though it is a good move, the results so far have not been very encouraging.

Very few companies have used the provision to bring back the profit. However, if these also known as controlled foreign corporations (CFC) rules are introduced in the Budget 2013-14, chances are that companies would use the tax provision to bring back the profit as the tax rate would be lower than what is applied under CFC rules.

CFC rules essentially help the government to limit artificial deferral of tax by using offshore low taxed entities. CFC rules are a part of the proposed Direct Taxes Code, which is being considered by the finance ministry for implementation.

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