The Hon’ble Finance Minister (FM) presented the Union Budget 2013 amidst major challenges facing the Indian economy. Some of the most important considerations for the FM were reviving growth, increasing savings and investments, reining in inflation and gaining back the confidence of the foreign investors. 

With these objectives in mind, apart from a number of incentives for women and the youth, the budget also proposed changesfor corporate taxation – some were music to their ears (eg. investment incentive for manufacturing companies, tax holiday extension for the power sector, deferment of GAAR), while others raised eyebrows (eg. increase in surcharge, tax on buyback, higher tax rate for royalties and fees for technical services).

In relation to dividends from foreign subsidiaries, the relief was two –fold:

­   Extension, for one more year, of lower tax rate on dividends received by an Indian parent / holding company from its foreign subsidiary

­   Removal of cascading effect of Dividend Distribution Tax (“DDT”) on such dividends from foreign subsidiaries when the Indian parent declares dividend to its shareholders.

A new section 115BBD was introduced vide Finance Act, 2011 whereby an Indian company receiving dividend from a specified foreign company (in which it has shareholding of 26% or more) was incentivized by taxing such dividends at the rate of 15% (as opposed to 30%).

The FM made his intention clear –“It has been represented that the taxation of foreign dividends in the hands of resident taxpayers at full rate is a disincentive for their repatriation to India and they continue to remain invested abroad. For the year 2011-12, I propose a lower rate of 15 per cent tax on dividends received by an Indian company from its foreign subsidiary. I do hope these funds will now flow to India”.

What is interesting to note is that this mini window of ploughing back of profits was initially opened for one year i.e. FY 2011-12 only. However, in order to continue to encourage repatriation of funds from overseas subsidiaries, it was extended to FY 2012-13 by Finance Act 2012 and now to FY 2013-14 by this Budget.

Further, section 115-O of the Income-tax Act,1961 providesthat the payer, i.e. the domestic company shall be liable to pay tax @ 15% (known as DDT) on any amount it declares, distributes or pays by way of dividends, whether out of current or accumulated profits. Such distributed dividend is exempt in the hands of recipients.

In a multi-tier corporate structure in India, this results in a multiple levy of DDT as an Indian holding company would pay DDT again on the dividends it declares to its shareholders.

The provisions were therefore amended to so as to remove the cascading effect of DDT. For computation of DDT, dividend payable by a company to be reduced by dividend received from its subsidiary, if such subsidiary has paidDDT on such dividend. This ensures removal of the cascading effect of DDT in a multi-tier structure where dividend is received by a domestic company from its subsidiary (which is also a domestic company).

Post the introduction of section 115BBD vide Finance Act 2011, representations were made to exclude the overseas dividend from DDT on the same lines as dividend received from Indian subsidiariesbecause on one hand, the concessional tax rate on such dividends acted as a mechanism for bringing in money lying in overseas jurisdictions but on the other hand it lead to a cascading effect being taxed in the hands of a multi-tier structured Indian company again at the time of distribution of such dividends.

Considering the above, section 115-O of the Act is proposed to be amended to introduce provisions similar to the existing ones, excluding dividends received from foreign subsidiaries from DDT. It is proposed that the Indian company shall not be liable to pay DDT on distribution to its shareholders on that portion of the income received from its foreign subsidiary on which tax has already been paid under section 115BBD by the Indian parent company. This amendment will take effect from 1st June, 2013.

The effect of such removal can be understood by way of following example:

Particulars Existing (INR) Proposed (INR)
Foreign company pays / declares dividend*

100

100

Tax payable on such dividends (A)**

16.22

16.995

Indian holding company declares dividend to its shareholders in India from its income (which includes the above income earned from foreign subsidiary)

200

200

Amount exempted from DDT

0

100

DDT Payable (B)

27.91

13.96

Dividends net of DDT

172.09

186.04

Total tax cost of Indian parent company (A+B)

44.13

30.95

* Assuming the foreign co is a subsidiary of the Indian parent company
** Assuming no withholding tax

Therefore, the amendment to exclude such foreign dividends from DDT compliments and facilitates the objective of repatriation of money back to India. However, this benefit is likely to be available for a limited set of companies – where shareholding is in foreign subsidiary. Though the advantage of lower rate of tax under section 115BBD is available for income from foreign subsidiaries in which the Indian parent holds more than 26% shareholding, the benefit of reducing dividend received from subsidiaries from profit distribution on which DDT is payable under section 115-O is available only in case of subsidiaries in which the Indian parent has more than 50% shareholding.  To tabulate:

Dividend income from foreign   company Applicability of Section 115BBD Applicability of Section 115-O (1A)
In which shareholding is less than 26% Not applicable, thus income taxable @ 30% plus applicable surcharge and education cess Not applicable, thus, DDT payable on total distributed profits
In which shareholding is more than 26% but less than 50% Applicable, thus income taxable @ 15% plus applicable surcharge and education cess Not applicable, thus, DDT payable on total distributed profits
In which shareholding is more than 50% Applicable, thus income taxable @ 15% plus applicable surcharge and education cess Applicable, thus, DDT payable on distributed profit after reducing such dividend received

 From the above it may be observed that the relief from cascading DDT would be available to companies which hold more than 50% of the equity shares in the foreign company. Hence it may be considered to extend the benefit to companies which hold 26% in the foreign company, since the dividend received from such companies would be eligible for a reduced rate of tax.

Article Authored by :-

–            Shradha Khandelwal, Deputy Manager, Deloitte Haskins & Sells

–            Swati Goyal, Deputy Manager, Deloitte Haskins & Sells

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0 responses to “Incentivizing flow of funds from foreign subsidiaries into India”

  1. Gagan Agarwal says:

    Sir, I am in the process of establishing a foreign subsidiary in the US. We are a Pvt. Ltd company in India.

    1. For taxation purposes, how do we bring back the profits to India. How do the shareholders in India get this money in their hands ?
    2. Do we have to pay additional taxes, even when we will be paying taxes in the US on our income in the company ?
    3. Can a Pvt. Ltd. company in India form a wholly owned LLC subsidiary in the US ?

    Please respond to my email address directly.

    Regards

    Gagan

  2. Pulkit says:

    DDT is levied @ 15% plus surcharge plus education cess, can’t understand how DDT payable of 27.91 & 13.96 have been arruved at.

  3. Ravi says:

    Computation of Rs 13.96 is wrong as it should be Rs 14.52 with total cost become of parent indian company is Rs 31.515.

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