Two years after abolishing the dividend distribution tax (DDT), Union Finance Minister Nirmala Sitharaman abolished the concessional tax rate on dividend income earned from overseas subsidiaries of Indian companies. Although made in the spirit of ensuring level-playing field, this change is likely to cause an adverse impact on some large organisations.
Let us understand what this means. Dividend income from foreign subsidiaries is currently subject to a concessional rate of 15 percent under section 115BBD of the Income Tax (I-T) Act. As the new amendment comes into force on April 1, 2022, the dividend income will be taxed as per the corporate tax rate. Consequently, the provision of section 115BBD will not apply from financial year 2022-23 onwards.
This will impact all Indian companies which have subsidiaries located abroad with at least 26 percent stake in them.
Impact on companies
These companies with foreign subsidiaries are present in several sectors including IT, pharma, auto, hospitality and engineering goods. Some of these entities include TCS, Infosys, Wipro, Tata Motors, Tata Steel, Dr Reddy's, Asian Paints, L&T and Mahindra & Mahindra
The experts argue that this diktat would add to the tax liability of major Indian companies.
The corporate tax rate currently ranges between 22 to 30 percent depending on the type of company with some concessions made for start-ups. For instance, income of new manufacturing domestic companies is taxed at 15 percent under section 115BAB with a surcharge of 10 percent. Else, regular companies are liable to pay income tax at the rate of 30 percent.
The Finance Bill states:
The experts opine that the provision would deter Indian companies from bringing cash back to India. Several companies may decide to hold on to their money outside India instead of bringing it back home.
But the government stated that the amendment was made to bring the existing provision (of taxing dividend at concessional rate) in alignment with the Finance Act 2020’s repeal of the dividend distribution tax.