Many companies and foreign portfolio investors (FPIs) are expected to find themselves in each other’s crosshairs over the issue of taxing dividend.
The onus is on companies to tax dividends of their investors before the pay-out. The question is at what rate should the FPIs be taxed — should they be taxed as per India’s tax treaties with the countries they are based at, or as per the domestic tax rates.
Also, even if they are taxed at lower rates under the tax treaties, that can only be applied to FPIs that are ultimate beneficiaries and not just passthrough vehicles registered in locations like Singapore or the Netherlands. This could become a point of dispute between companies and FPIs — investors would want taxes to be deducted as per tax treaties but the companies could seek clarity over their structure before doing so.
“There is no clarity as to whether companies declaring dividends need to withhold tax at 20 per cent or at the higher rate of 30 per cent or 40 per cent as per TDS (tax deducted at source) rates prescribed in the Income Tax Act. It is also unclear whether the benefit of lower withholding under tax treaties can be extended to FPIs,” said Himanshu Parekh, the head of corporate and international tax at KPMG.
Following the removal of dividend distribution tax (DDT), companies would be required to tax the dividends and then distribute it to investors, including FPIs. While companies and individuals could be taxed at up to 40 per cent, the rate for FPIs would be 20 per cent. But FPIs that are acting as passthrough vehicles could face tax up to 40 per cent.
The problem, say people who are monitoring the issue, is what would be the tax rate applicable for the FPIs. While FPIs are eligible to avail of tax rates as prescribed in their respective tax treaties — 5 per cent to 15 per cent — companies are in a quandary of the tax rate applicable.
Meanwhile, tax experts said many FPIs would be able to set off taxes against their capital gains tax as well.
“Foreign portfolio investors which have active investments already file tax returns in India and so when companies deduct tax at higher rates, the FPIs could offset the same against their capital gains tax for subsequent months or claim the excess as a refund. The bigger problem could be for private equity investors who do not have regular annual income to set off the higher taxes levied on dividends and may not even be filing returns in India if they don’t have any other income,” Deloitte India partner Rajesh H Gandhi said.
Earlier, the DDT was around 20 per cent in the hands of the company, which meant this was a pure cost. Any investor or the holding company that got dividend under that rule would not have been able to set it off that against liability in their home country.
After the change announced in the budget to remove the DDT, FPIs will be able to set off the tax paid on dividends either in their home country or in India.
The issue is that if companies deduct higher taxes, they will be required to file returns here and, in some cases, claim refunds, which may take time. Industry trackers said this could also lead to litigation as the taxman could question these transactions.
Companies taxing dividends also face a dilemma. Some of them fear that taxing FPIs as per domestic tax laws — at a higher rate — could mean this set of investors might exit their company, Parekh said, adding, “In case tax is withheld at a higher rate, the non-resident shareholder will have to file tax return and seek a refund of excess tax withheld, leading to cash flow issues for them.”
Source : Financial Express