Executive summary
Abolishment of dividend distribution tax and make its
taxable in hand of share- holders has stopped multi-level scheme of Taxation on
dividend income and disallowance of expenses1 related to
dividend income. Foreign Investor would also benefit from available foreign tax
credit in home country on Income tax withholding in India.
Income Tax withholding for resident shareholder is 10%
and 20% (plus applicable surcharge and cess) for foreign shareholder. Foreign
shareholder can certainly avail Foreign Tax credit. Indian Income tax withholding tax would be further reduced
to tax rate as per Tax treaty.
Pre TCJA, 2017, Foreign Tax credit was available
u/s 902 of IRC on Indian dividend distribution tax and corporate income tax.
Now, India investment planning in most import for available lesser withholding
tax rate 5% through Mauritius or Hongkong.
For availing tax treaty benefits,
foreign investor is required to furnish income Tax return in India and
establish substance in these jurisdictions Income Tax withholding in hand of
Mauritius shareholder as 5%. However, income
tax withholding in hand of UK and US shareholder is 10% and 15% respectively.2
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1 Section 14A of Income Tax Act, 1961 and rule
8D.
Income
Tax on dividend Income under
Income Tax Act, 1g62(“Act”)
Section 115O of the Act impose income tax @15% (plus applicable surcharge and cess
on grossed up basis ~20.56%) in the hand on Indian
Domestic Company3 and considered non- taxable in the hands of shareholders. Shareholder were also subject
to income adjustment u/s14A of the Act for earning aforesaid dividend income.
Finance bill 2020 has deleted the aforesaid section,
therefore, dividend declared post April1,
2020 would be taxable in the hand of shareholders u/s 57 of the Act.
Deduction on account of interest expense, and in any previous year
such deduction shall not
e xceed twenty per cent
of the dividend income, or income in respect of
such units, included in the total income for that year, without deduction under
this section.
Section
80M 4 allow deduction for dividend received by domestic corporation, if
the same is distributed by the recipient domestic corporation before filing
return of Income.
Article 1o
– Dividends – India Mauritius
1.
Dividends
paid by a company which is a resident of a Contracting State to a resident of the
other Contracting State may be taxed in that other State.
2. However,
such dividends may also be taxed in the Contracting State of which the company
paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial
owner of the dividends the tax so charged shall not exceed—
(a)
five per cent of the gross amount
of the dividends if the beneficial owner is a company
which holds directly at least 10 per cent of the capital of the company paying
the dividends ;
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t ax%20Act,%201961/2009/102120000000023612.htm
4 ‘80M. (1) Where the gross total
income of a domestic company
in any previous year includes
any income by way of dividends
from any other domestic company, there shall, in accordance with and subject to
the provisions of this section, be allowed in computing the total income of
such domestic company, a deduction of an amount equal to so much of the amount
of income by way of dividends received from such other domestic company as does
not exceed the amount of dividend distributed by the first mentioned domestic
company on or before the due date
(b)
fifteen per cent of the gross amount of the
dividends in all other cases.
This paragraph
shall not affect
the taxation of the company
in respect of the profits
out of which the dividends are paid.
3. Notwithstanding the provisions of paragraph (2), dividends paid by a company which is a resident of Mauritius to a
resident of India may be taxed in Mauritius and according to the laws of
Mauritius, as long as dividends paid by companies which are residents of Mauritius are allowed as deductible expenses
for determining their taxable
profits. However, the tax charged
shall not exceed
the rate of the Mauritius
tax on profit of the company paying the dividends.
4. The
term "dividends" as used in this Article means income from shares or
other rights, not being debt-claims, participating in profits, as well as
income from other corporate rights which is subjected to the same taxation
treatment as income from shares by the laws of the Contracting State of which
the company making the distribution is a resident.
5. The
provisions of paragraphs (1), (2) and (3) shall not apply if the beneficial
owner of the dividends, being a resident of the Contracting State, carries on
business in the other Contracting State of which the company paying the
dividends is a resident, through a permanent establishment situated therein or
performs in that other State independent personal services from a fixed base
situated therein and the holding in respect of which the dividends are paid is
effectively connected with such permanent establishment or fixed base. In such
a case, the provisions of article 7 or article 14, as the case may be, shall apply.
6. Where a company which is a resident of a Contracting State derives profits
or income from the other
Contracting State, that other State may not impose any tax on the dividends
paid by the company, except insofar as such dividends are paid to a resident of
that other State or insofar as the holding in respect of which the dividends
are paid is effectively connected with a permanent
establishment or a fixed base situated in that
other State nor subject the company's undistributed profits to a tax on the
company's undistributed profits, even if the dividends paid or the
undistributed profits consist wholly or partly of profits or income arising in
such other State.
India deposited Multilateral Instrument (MLI) does not
amend article 10(2)(a) above 5 .
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Income tax withholding on dividend income by domestic
company
Section 115A of the Act provide Income tax withholding
rate @20% (plus applicable cess surcharge) and relief to non-residents from
filing of return of income where the non-resident is not liable to pay tax
other than the TDS which has been deducted as per section 115A of the Act.
Section 194 amended
to include dividend
for tax deduction. At the same time the rates of ten per cent. is proposed to be prescribed and threshold is proposed
to be increased from Rs 2,500/- to Rs 5,000/- for dividend paid other than cash.
Domestic
company while paying dividend to non-resident are required withhold income tax
at applicable rate under section 115A of the Act or as per treaty. It is worth
to explore to obtain lower rate of deduction u/s197 of Act to avoid any tax
dispute in future years.
Check substance: Mauritius Tax resident
CBDT circular789/2000, upheld by Hon’ble Supreme Court
of India in its’ judgement of Union Of India (Uoi) And Anr. vs Azadi Bachao
Andolan And Anr. establish that TRC issued by Tax resident
certificate(“TRC”) issued by Mauritius Revenue Authority. However, this is
being challenged by Indian tax administration to avoid treaty abuse by Tax
payer. Therefore, it is very essential for Tax payer to check whether Mauritius
Corporation has substance as may be challenged by GAAR provision under the Act.
Point to consider establishing substance:
1. Tax
resident certificate (Required)
2.
Article 27A of Tax treaty – Limitation
of benefit on Article 13(3B)6
(recommended
by author)
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6 LIMITATION OF
BENEFITS
1.
A resident of a
Contracting State shall not be entitled to the benefits of Article 13(3B) of this
Convention if its affairs were arranged
with the primary purpose to take advantage of the benefits in Article 13(3B) of
this Convention.
2.
A shell/conduit
company that claims it is a resident of a Contracting State shall not be
entitled to the benefits of Article 13(3B) of this Convention. A shell/conduit company
is any legal entity falling
within the definition of resident
3. Place of effective management (a) Board
composition and educational and technical qualifications of the Board of
Directors of the Mauritius entity (b) At least majority of the Board are local
Mauritius residents, (c) Board meeting, review of account and investment by holding company considering
account, finance and audit and administrative expenses etc. (d) legal &
professional fees related to Investment (e ) Employee head count ( f) Mauritius entity
has made investments in jurisdictions other
than India (g) Place where the
meetings of Board of Directors of the Mauritius entity (h) Whether Mauritius
entity is an independent legal entity capable of taking its own decisions (i)
Mauritius entity Board of Directors minutes of discussions/ deliberations
related to prior to investment decision, review of investment etc. (wish list)
4. Detailed analysis of operating
performance of Indian
entity and request
for dividend should not drive by Tax benefits (wish list)
5.
Uncommon director/Key personnel of Indian
entity/ultimate and Mauritius entity (wish list).
6. Hire
third party consultants by Mauritius Board and support by report (wish list)
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with negligible or
nil business operations or with no real and continuous business activities
carried out in that Contracting State.
3.
A resident
of a Contracting State is deemed to be a shell/conduit company
if its expenditure on operations in that Contracting
State is less than Mauritian Rs.1,500,000 or Indian Rs. 2,700,000 in the
respective Contracting State as the case may be, in the immediately preceding
period of 12 months from the date the gains arise.
4.
A resident of a
Contracting State is deemed not to be a shell/conduit company if:
(a) it
is listed on a recognized stock exchange of the Contracting State; or
(b) its
expenditure on operations in that Contracting State is equal to or more than
Mauritian Rs.1,500,000 or Indian
Rs.2,700,000 in the respective Contracting State as the case may be, in the
immediately preceding period of 12 months from the date the gains arise.
Explanation: The cases of legal entities
not having bona fide business activities shall be covered by Article 27A(1) of
the Convention.]
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