Dividend relief for firms abroad with local assets
Dividend payment by an overseas company with related assets in India will not be taxable in India, the govt says
New Delhi: The income tax department on Thursday clarified that dividend payment by an overseas company with related assets in India will not be taxable in India, as part of the government’s efforts to remove ambiguities in indirect transfer provisions under the Income Tax Act.
In a circular, the Central Board of Direct Taxes clarified that section 9(1) of the Income Tax Act will not be applicable for such dividend payments. The section deals with levying of tax on capital gains in transactions where transfer of shares between two overseas entities leads to a change in ownership when the underlying assets are in India.
The circular will provide relief to multinational companies who have presence in various countries.
“Declaration of dividend by such a foreign company outside India does not have the effect of transfer of any underlying assets located in India. It is, therefore, clarified that the dividends declared and paid by a foreign company outside India in respect of shares which derive their value substantially from assets situated in India would not be deemed to be income accruing or arising in India,” the circular said. “This may cause unintended double taxation and would be contrary to the generally accepted principles of source rule as well as the objec
The previous Congress party-led United Progressive Alliance government had inserted an explanatory provision in the Finance Act 2012 which clarified that an “asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shalt always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India”.
Though this retrospective amendment was primarily done to counter the Supreme Court judgement in the Vodafone Group Plc. case, investors had raised concerns that the provisions may result in taxation of dividend income declared by a foreign company outside India.
In January 2012, the Supreme Court had ruled against the income tax department and said that Vodafone’s $11 billion acquisition of Hutchison Essar Ltd, now known as Vodafone India Ltd, was not taxable in India.
To counter this, the government introduced retrospective amendments to tax laws to bring such indirect transfer of shares under the tax net. It also introduced a validation clause that effectively made Vodafone liable to pay tax in India, despite the Supreme Court judgement.
Since taking charge in May last year, the National Democratic Alliance government has sought to allay fears among investors on the retrospective amendments to the Income Tax Act. In the budget for the year starting 1 April, finance minister Arun Jaitley proposed a host of provisions to clean up the indirect transfer section in the Act. He proposed that only those indirect transfer transactions will be brought under the capital gains tax net where 50% of the value of all assets owned and controlled are located in India. He has also stipulated that the value of such assets should exceed Rs.10 crore.
“It is a welcome move and in line with the current government’s thinking of removing all ambiguities and possible different interpretation of the Income Tax Act,” said Vikas Vasal, partner, KPMG in India. “The finance bill had clarified on a number of indirect transfer provisions. Now, the tax department is clarifying on the dividend issue through a circular,” he said.
