Fiscal pacts can help foreign investors

NEW DELHI: The abolition of the dividend distribution tax (DDT) and return to the classic system of taxing dividends in the hands of shareholders or unit holders can encourage foreign investors to inject funds through countries with the that India has a double tax evasion agreement (DTAA). Such countries include Mauritius, Saudi Arabia, Malaysia, Sri Lanka and Singapore.

The rates of the treaties under DTAA with Mauritius and Singapore are substantially lower than the normal tax rates for foreign shareholders with 20% more surcharge and cessation, said Suresh Surana, tax consultant and founder and director of RSM India.

Previously, since DDT was deducted before it was distributed, receiving investors had no choice but to assume the burden of this tax. Now, it will be taxed in the hand of the recipients, and they can plan it in the way that suits them, said the consultant.

For people, the tax on dividends can reach up to 42.7% for those whose income is more than Rs 5 crore. However, in the case of foreign shareholders, it will be 20% with a surcharge of 7.5% and a decrease of 4%, bringing the rate to 22.4%. But, for foreign investors, there is a way out to avoid paying taxes at this rate.

The government has signed agreements with several countries to impose DDT. All agreements were applied as of October 1, 2019 and the provisions would be applicable from 2020-21.

Under this, if a company based in Mauritius, Saudi Arabia and Malaysia invests in an Indian company, the receiving company will have to pay taxes of only 5% of its dividend income, if at least 10% of the capital of India the company, which is paying the dividend, is in the hands of the recipient. Otherwise, the receiving company will have to pay a 10% tax.

Similarly, shareholders in the United Kingdom, Germany, United Arab Emirates and many other companies must pay a flat rate of 10%. However, if a company is based in Singapore, the company will have to pay a 10% tax on the dividend it receives from an Indian company, if at least 25% of the paid capital of the distribution company pays the dividend is withheld. by the receiver In any other case, the dividend tax would be 15%. For US shareholders, the tax on dividends of Indian companies would be taxed at 15%, if the shareholder owns 25% of the paid-up capital of the Indian distribution company.