DDT Abolition & TDS on dividend to Non-Resident Investors

Abolition Of Dividend Distribution Tax (DDT) – A Compliance Burdens When It Comes to TDS Of Non-Resident Investors

Introduction:-

Finance Act, 2020 has abolished DDT regime under which Dividends paid by Domestic Company were exempt in the hands of receivers (including Non-Residents). Thus now companies will be liable to deduct TDS under following sections:-

One of the issue which is under discussion is the situation wherein Section 196D is applicable then whether benefit of DTAA can be given or not since unlike Section 195 where it is mentioned that TDS is to be deducted at Rates in force which also include rate as per Section 90 / 90A, Section 196D simply provides the rate of 20%.

In this article, Author is restricting the discussion only in respect to withholding to be done in case of Non-Resident Investors other than those covered u/s 196D.

Analysis of Income Tax Provisions for Dividend Taxable in the hands of Non-Residents:-

Kindly note in this respect that although Section 115A and Section 115AD, Tax rate applicable on Dividend Income is 20%. However same is not the rate on which tax is to be withheld.

Section 195 states that TDS is to be deducted on “Rates in force” which is defined in Section 2(37A) which provides that:-

“for the purposes of deduction of tax under section 194LBA or section 194LBB or section 194LBC or section 195, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year or the rate or rates of income-tax specified in an agreement entered into by the Central Government under section 90, or an agreement notified by the Central Government under section 90A, whichever is applicable by virtue of the provisions of section 90, or section 90A, as the case may be.”

Thus one need to check rates specified in Finance Act for withholding taxes on dividends being distributed to Non-Resident (not being a company) or to a foreign company. The summary of rates provided in Finance Bill, 2020 as passed by Lok Sabha on 23^rd Mar, 2020 is as below:-

Further in the Finance Bill, 2020 passed by Lok Sabha on 23^rd Mar, 2020 it has been clarified that maximum surcharge applicable on said Income shall be 15%. Thus TDS rate applicable on payments of Dividend shall be as below:-

TDS rate applicable on payments of Dividend

Analysis of DTAA Provisions for Dividend Taxable in the hands of Non-Residents:-

Withholding tax rate to be applied u/s 195 is always the beneficial rate amongst the rate as per Income Tax Act or rate as per DTAA. Most of the treaties that India has entered provides beneficial rates than the rate as per Income Tax Act (As mentioned above). Further in certain DTAAs, two rates have been agreed wherein a further favorable rate is provided for recipient holding shares above a specified percentage. However it is to be noted that most of the treaties state that subject Article of Dividend Income shall be applicable only if recipient is also a beneficial owner.

View above, for a non-resident it is always beneficial to apply the provisions of DTAA since even if DTAA says 20% then also same shall be considered to be inclusive of Cess and Surcharge.

Rates prescribed in various DTAA on Dividend Income can be checked from the link https://www.incometaxindia.gov.in/Pages/charts-and-tables.aspx -> Withholding Tax Rates

However one need to obtain certain documents which includes TRC, Form 10F, beneficial ownership confirmation etc. to provide the benefit of DTAA to the Dividend Received.

An example of treaty which contains condition regarding minimum holding criteria:-

Below are the withholding tax rates applicable for Indian company paying Dividend to a resident of Canada:-

a) 15%, if at least 10% of the voting powers in the company, paying the dividends, is controlled by the recipient company;

b) 25%, in other cases

Impact of MLI on above analysis:-

Multilateral Instrument (MLI) is one of the BEPS Action Plan (Action Plan 15) which is an initiative to modify various DTAAs at one go. India has also ratified the MLI document in FY 2019-20. Now India’s DTAA with all those countries who have ratified before 31^st Dec, 2019 is to be read along with MLI positions w.e.f. 1^st April, 2020 for withholding tax compliances. India’s position on MLI can be checked in detail on the link http://www.oecd.org/tax/treaties/beps-mli-position-india.pdf.

MLI also consisted a clause in respect of withholding tax provisions in respect to Dividend Income. Under Article 8 of the MLI, India has opted for applying a condition that in case of certain tax treaties wherein condition has been prescribed for a minimum holding percentage to apply lower rate than such holding condition should be fulfilled throughout 365 day period that includes the day of the payment of the dividends (for the purpose of computing that period, no account shall be taken of changes of ownership that would directly result from a corporate reorganization, such as a merger or divisive reorganization, of the company that holds the shares or that pays the dividends).

In the example above of India and Canada DTAA, now since India and Canada have submitted ratification on 25.06.2019 and 29.08.2019 respectively. Thus beneficial rate of 15% as per treaty will be available only if 10% shareholding condition is fulfilled throughout 365 day period.

However one also need to check whether both the countries have opted for such provision of MLI. For example for the purpose of Article 8 of MLI, India has selected DTAA of Singapore to be modified but Singapore has not opted for Article 8 in its entirety. Thus MLI will not bring any impact on Dividends being paid to residents of Singapore.

Author’s Comment:-

Abolition of DDT has brought a huge compliance burden on Indian companies having non-resident investors. Since deducting TDS @ 20% / 30% / 40% plus applicable surcharge and cess will make the shareholders unhappy and result in reduction of market cap since share will be sold by such Investors due to their funds getting blocked because of management of the company. Further if the company decides for opting lower rate under DTAA then first condition is that company should be able to obtain all necessary documents.

Considering a case of listed company, there may be a lot of non-resident shareholders. Thus obtaining documents from all such non-resident shareholders shall be a cumbersome process. Further the time frame within which such 15CA / CB are to be prepared will pose another headache for these corporates as the withholding rate may vary investor wise due to they being from different country or few of them unable to provide certain documents and further there can be a huge number of non-resident investors as well.

Conclusion:-

Abolition of DDT has been cheered by Non-Residents including Foreign Companies as they will now be able to take credit of taxes paid in India on such Dividend Income. However this will make the task of Indian Corporates burdensome since apart from deduction of TDS from Dividend of large number of residents, the compliance requirement for TDS on payment of Dividend to Non-Resident is a very cumbersome process.