The Centre may propose amendment in the tax laws to allow Indian corporates to apply tax treaty rates while withholding tax on dividends and interest to be paid to FPIs.
The move is expected to facilitate foreign portfolio investors (FPIs) as they will not need to claim a tax refund for surplus taxes withheld by Indian corporates, while filing their annual income-tax returns in India.
Sources said the changes may be proposed in Budget 2021 and form part of the Finance Bill that will amend the tax laws to give effect to the proposal.
With effect from April 1, 2020, (dividend distribution tax) DDT has been abolished and dividend has been made taxable in the hands of shareholders at applicable rates. But while distributing dividends to FPIs, Indian companies withhold tax at prevailing domestic rates and pass on the balance amount to overseas investors. FPIs then have to seek a refund of surplus tax withheld by Indian corporates, while filing their annual income-tax returns in India.
Present rate of DDT is at 15 per cent on gross basis plus surcharge and cess, resulting in a net tax rate of 20.56 per cent.
With the changes that are being considered, FPIs would come at par with other non-resident investors (e.g., FDI investors), who currently enjoy tax treaty benefits at the withholding tax stage on their Indian-sourced dividends and interest.
Being non-residents, FPIs can also avail the benefits of applicable bilateral tax treaties where rates are normally lower or the transfer is completely exempt from any tax. But under the domestic tax law, Indian companies are not permitted to apply lower tax rates as prescribed by a tax treaty while withholding tax on dividends and interest to be paid to FPIs.
According to Deloitte India, this is the reason why the domestic tax law needs to be amended to allow Indian companies to apply tax treaty rates for withholding tax on dividends and interest payments to FPIs, as currently available to other non-resident investors.
Facilitating FPIs is also expected to boost the investment climate in the country as these investors have been very active on the Indian market throughout the Covid pandemic keeping its momentum going. FPIs activity is one of the reasons why Sensex is within touching distance of its historic level of 50,000 points.