Under the existing provisions of the IT Act, dividend received from foreign subsidiary companies is taxable in the hands of the Indian parent company @ 30% (plus applicable surcharge and cess). This acts as a major disincentive for the Indian parent companies having subsidiaries outside India, as the profits of foreign subsidiaries are already taxed outside India and the dividends distributed are out of such after-tax profits.
The Bill proposes to insert a new section 115BBD to provide tax on such foreign dividends at a reduced rate of 15% (plus applicable surcharge and cess) on the gross amount of dividends. No expenditure in respect of such dividends shall be allowed under the IT Act.
For the purpose of section 115BBD, subsidiary foreign company means a foreign company in which the Indian company holds more than half of the nominal value of the equity share capital. Further, dividend shall not include deemed dividend as per section 2(22)(e) of the IT Act.
This is a very positive step for improving inflow of funds to India. This provision is in line with similar regulation introduced in the US in recent years to improve dividend inflows. However, taxability of such foreign dividends under MAT may partially negate the benefit of concessional tax rate. There is no rationale to restrict the concessional tax treatment only to Indian companies and the same should have been extended to all types of taxpayers. Further, it is to be seen as to how the aforesaid provision would be aligned in the DTC in the light of CFC Regulations contained therein. These regulations provide for taxability of income attributable to a CFC, irrespective of whether the dividends are distributed or not by such foreign corporations.
However, taxability of such foreign dividends under MAT may partially negate the benefit of concessional tax rate.