Currently there is a 15 % tax on companies making a dividend distribution. As announced in India’s federal budget on the 1 February 2020, this is now to be replaced with a 10% withholding tax on recipient shareholders. This proposed abolishment of the dividend distribution tax regime will be effective for dividends declared, distributed or paid on or after 1 April 2020.
The current system is particularly unfavourable to foreign shareholders who often experience surcharges in addition to the 15% bringing the amount to 20% and who are not currently eligible for a tax credit. However with the tax liability being shifted from the companies declaring to the shareholders receiving after April 2020 they should now be eligible to claim credit for the tax paid in India subject to their domestic tax law and any respective treaty provisions.
With regards to respective tax treaties the proposed changes will particularly benefit non-resident investors in countries with whom India has tax treaties, such as France and the United Kingdom where they have set withholding tax rates.
It is also intended to extend a 5% special withholding tax rate in interest payments to non-residents on certain borrowings from 1 July 2020 to 1 July 2023. In addition non-residents are to be granted additional exemptions from filing income tax returns.
Whilst the above is an expected and obvious attempt to attract foreign investment it should be noted that there have been additional proposals to change the current residency rules which have been in place for many years. Indian citizens and persons of origin who visit India are currently considered as non-resident if they stay in India for less than 182 days in the tax year. The proposed changes would reduce this to 120. Therefore non-residents wishing to benefit from the above changes will need to assess their residential status in light of this especially with regards to whether they are ‘ordinarily resident’ or ‘not-ordinary resident’ as the tax liability in India differs for both categories. Further proposals have also been made with regards to ‘deemed residency’ and therefore Indian citizens who are not liable to tax in any other country may be deemed tax resident in India, although income earned outside India shall not be taxed in India unless it is derived from India.
If you believe that any of the above may affect your current business arrangements and would like to discuss please do not hesitate to contact us.