30% tax rate on dividend from foreign affiliates from April 1

ameya's picture

Owing to "Vote on Account" and keeping up with the tradition, the Finance Minister did not announce any changes to the Income tax Act, 1961 in the Finance Bill presented yesterday. One of the consequences of not making any changes to the rates is that effective April 1, 2014, dividend received by an Indian company from its foreign affiliate, would be taxed at the full rate of @ 30%.


Government in 2011 had introduced lower tax rate of 15% on dividends received from foreign affiliates (in which Indian company holds 26% or more equity). The lower rate which was initially introduced for one year in FY 2011-12, was extended in subsequent two budgets and is available upto March 31, 2014.


The intention of introducing this incentive was for encouraging repatriation of income earned by residents from investments made abroad. While extending lower tax rate in the last year's Budget, Government had clarified that "In order to continue the tax incentive for one more year, it is proposed to amend section 115BBD to extend the applicability of this section in respect of income by way of dividends received from a specified foreign company in Financial Year 2013-14 also, subject to the same conditions." Thus, Government's intended to extend this benefit only for one year.


In other words, dividend remittances from foreign subsidiaries effective April 1st, would be taxed at higher rate of 30%. This ofcourse can again be lowered when the next Government announces its Budget later this year after the election results. However, considering the new budget process and timing, it is unlikely that such reduction, if any, proposed by the new Government will be translated into the Finance Act before June 15, which is the due date for first advance tax installment for corporates. Therefore, the non-extension will surely increase tax outgo for the corporates on dividend income atleast in the first quarter of next fiscal.


On the other hand, corporates expecting dividends earnings from their foreign affiliates should consider repatriation before March 31, 2014.