Budget: Concessional rate dumped, foreign dividends now under tax ambit

Concessional rate of tax on dividends received by Indian companies from foreign subsidiaries will be done away with from April 1, a change that may hamper global expansion of Indian companies and compel some firms to move their headquarters out of India to geographies such as Singapore and Dubai.

At present, dividends received by Indian companies from their foreign subsidiaries are subject to a concessional tax rate of 15 per cent under Section 115BBD of the Income Tax (I-T) Act. The provisions of this section shall not apply from assessment year 2023-24 onwards, according to the Finance Bill.

“Clause 27 seeks to amend Section 115BBD of the I-T Act relating to tax on certain dividends received from foreign companies,” the Bill stated. “The said section, inter-alia, provides that in case of an Indian company whose total income includes any income by way of dividends declared, distributed or paid by a foreign company, in which the said Indian company holds 26 per cent or more in nominal value of the equity share capital, such dividend income shall be taxed at 15 per cent.”

This means, dividends from foreign entities will be taxed at the applicable corporate tax rate. This will adversely impact all Indian companies, including holding companies, that have overseas subsidiaries in which they hold a stake of 26 per cent or more.

A host of large companies such as TCS, Infosys, Wipro, Tata Motors, Tata Steel, Dr. Reddy’s, Asian Paints, L&T and Mahindra & Mahindra from sectors as diverse as IT, pharmaceuticals, automotive, hotels and engineering goods could be hit hard by the new diktat.

“Withdrawal of the concessional rate of taxation on dividend income from foreign companies will result in increased tax liability for Indian companies,” said Suresh Swamy, partner, Price Waterhouse & Co.

“With the abolition of DDT regime by Finance Act 2020, dividend received by an Indian company from a domestic company became taxable at the corporate tax rate applicable to the Indian company. The amendment has been proposed to create a level-playing field, with effect from April 1, 2023,” added Amit Maheshwari, partner, AKM Global.

Corporate tax rates range from 15-30 per cent (plus surcharge and cess) depending on the type of company. For instance, under Section 115BAA, domestic companies have an option to pay income tax at 22 per cent, plus surcharge and cess if they meet certain criteria. Income of new manufacturing domestic companies is taxed at 15 per cent under Section 115BAB with a surcharge of 10 per cent.

According to Tejas Desai, partner at EY India, the latest amendment is a revenue mobilisation tool and will impact companies across sectors with profitable foreign operations. “It may drive up the tax cost of repatriation of the funds back into India, unless the dividends so received are further distributed to its shareholders within specified timelines (before filing the tax return),” he said.

Yashesh Ashar, partner, Bhuta Shah & Co. believes the withdrawal of tax concession could impact the global expansion of Indian companies. “This is may have commercial implications on the overall structure for Indian companies or start-ups going global as well as encourage spin-off of their existing structures,” he said.

Companies may choose to move their headquarters to Singapore or Dubai, which does not tax income from dividends, Ashar said. Similarly, some European countries give participation exemption, whereby dividend incomes are exempt from tax if the holding in a company exceeds a certain threshold.