|By Rajeev Dadhich, Student-Institute of Law, Nirma University, Batch of 2018-23|
The term dividends means a sum of money paid at regular interval by a company to its shareholders out of its profits. And the term repatriated means converting any foreign currency into one’s local currency. Repatriation often turns out essential in a business transactions, foreign investments, or international travel.
Under the previous regime, Dividends were freely repatriated without any restrictions as long as taxes are paid, notably the Dividend Distribution Tax (DDT). Tax credit and/or tax relief is not applicable for the DDT or for repatriation of dividends. Companies do not require permission from the RBI, but the remittance must be made through an authorized dealer. Further, there is a limited list of 22 consumer goods industries where repatriation of dividends is subjected to certain requirements including the manufacturing of food products, coffee, and soft drinks among others.
Dividends can be repatriated in the middle of the year with interim dividends after the DDT is paid. However, if using interim dividends, the company must have enough book profits to pay the dividend and enough money to pay taxes in India. If at the end of the year that turns out not to be possible, the directors may be made personally liable and be penalized, as a mistake on their part to declare interim dividends on the wrong judgment. Profit can also be repatriated along with capital through buyback of shares as long as a buyback tax of 20 percent is paid on profits distributed by companies to shareholders. Additionally Dividend distribution tax is charged at the rate of 15 per cent on gross basis plus applicable surcharge and cess (effective tax rate of 20.56%).
The finance minister in the finance bill, 2020, amongst the different direct tax proposal inscribed in the Finance Bill, 2020 (‘Finance Bill’) a key corporate tax amendment proposed to be brought in by current Finance Bill relates to escape the incidence of taxation on dividend income in the hands of investor by abolishing the concept of Dividend Distribution Tax (‘DDT’). In the deriving paragraphs, an attempt is made to elucidate these proposals undertake an impact analysis of the abolishment of DDT on various stakeholders.
With DDT being abolished, cash repatriation is made far more tax effective because now the concept of double taxation will not applied to repatriate the dividend. Now the dividend will only be subjected to the tax treaties. The rate of tax on dividends in India prescribed in most of the tax treaties is 10%, and there are a few treaties with an even lower 5% rate. Hence, foreign companies can now pay taxes on dividend at this reduced rate and claim the credit of the same in the country of residence. This will attract more investors in the Indian market because of the margin of profit and security provided by the new laws.
The Union Budget 2020 has laid all speculations to rest by removing the DDT all together. Section 115-O of the Income Tax Act, 1961, is proposed to be amended to provide that dividend declared, distributed or paid after March 31, 2020, will not be subject to DDT. Related amendments have also been proposed in other sections which relate to tax deduction at source from such dividend (Section 195), withdrawal of exemption of dividend income (Section 10(34)), removing cascading tax effect of dividend distribution (Section 80M), etc.
Under schedule III of Foreign Exchange Management (mode of payment and reporting of non- debt instruments) Regulation, 2019 investment by NRI or OCI on repatriation basis is enacted. Wherein, it is mentioned that the amount of consideration shall be paid as inward remittances from abroad through banking channels or out of funds held in NRE in accordance with Foreign Exchange Management (deposit) Regulation, 2016.
Foreign Exchange Management (Deposit) Regulation, 2016, under section 4, i.e. exemption, clearly states that the funds in the account may be repatriated outside India without the approval of Reserve Bank. This regulation is amended up to 13th November, 2019 and after that no further amendments have been made to this provision even after the abolishment of DDT.
Hence, abolishment of DDT has not amended the threshold for the dividends to be repatriated. Wherein this abolishment has created the Indian market an point of attraction for investment because not the concept of double taxation will not be there which will increase the profit margin.
Therefore, in the summary the scenario pre- Dividend distribution tax abolishment was such that no approval was required from any of the authorities for dividends to be repatriated. The Hon’ble Finance Minister, in her budget speech has indicated the increased cost of equity due to the tax costs on repatriation. It is needless to say that abolishment of DDT is a positive move to attract foreign investments. The cash repatriations in the past have proven to be costly. With DDT being abolished, cash repatriation is made far more tax effective and the criteria of approval from authorities for dividends be repatriated outside India remains same post- DDT abolishment.