No concessional tax rate on dividends from foreign entities to impact startups, companies looking to bring in cash to India

The government’s decision to do away with a concessional rate of tax on dividends received by companies from foreign entities or subsidiaries could impact outbound investments by startups and demotivate companies to bring back cash to India, said tax experts.

Up until now, the dividend received by an Indian company from a foreign subsidiary or company where it held at least 26% was taxed at a concessional rate. The concessional rate—15%—has now been removed, the finance minister said Tuesday.

"The withdrawal of the concessional rate of tax on dividends will impact the existing companies with outbound investments and also significantly impact the global aspirations of the new age startups desiring to continue having a headquarters in India. This may impact the global expansion of Indian companies as well as promoters offshore of Indian-based businesses," said Yashesh Ashar, partner, Buta Shah & Co.

Tax experts say this is also set to impact the incentive for companies to bring back cash to India. Many companies may decide to hold on to cash or money outside India rather than bring it here.

The government stated that the change was made in accordance with the Finance Act 2020's repeal of the dividend distribution tax and to create a level playing field.