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Tax rebate will bring back black money: Ministry

March 31, 2011 10:32 IST
The finance ministry has exuded confidence that its move to halve the tax rate on dividends received by Indian companies from their foreign subsidiaries will bring back black money from tax havens, besides profits from Indian investments abroad.

The finance ministry has halved the tax rate on foreign dividend from 30 per cent to 15 per cent, but the rebate is allowed only for the financial year 2011-12, and the companies may be forced to pay tax at 30 per cent from the next financial year, when the ministry will introduce Controlled Foreign Corporation rules.

"The one-time tax relief may help us bring home dividends held back in low-tax jurisdictions. Some amount of black money may also come to the country.

"We are giving them an opportunity to declare the dividends, which they have been holding back for the past few years, and pay tax at half the rate this year," said a finance ministry official who didn't want to be identified.

Under the CFC rules, if a foreign entity has not distributed the dividends to the Indian company, its income would be considered distributed and the shareholders would be taxed accordingly.

Thus, the rules will allow authorities
to tax companies that defer payment of tax, mainly those in low tax jurisdictions.

"We had asked the Reserve Bank of India to provide some data on dividend income brought back to India.

"Their data showed it is minuscule at present. Since the tax rate has been halved, we are expecting a substantial increase in the dividend income in 2011-12," the official added.

In the last couple of years when India became a net exporter of capital, companies started holding back their dividends because they found the tax rate of 30 per cent too high.

At present, when Indian companies declare dividends, the dividend distribution tax is levied at 15 per cent.

However, in the hands of the recipient, promoters or individual shareholders there is no DDT.

But when a foreign subsidiary of an Indian company pays out the dividend, DDT is slapped at 30 per cent.

In the Budget for 2011-12, Finance Minister Pranab Mukherjee had proposed to provide the lower tax rate only for companies where the Indian companies held more than 50 per cent share capital.

In reply to the Finance Bill debate, he relaxed it further by lowering the holding requirement in the foreign company from 50 per cent to 26 per cent to enable overseas joint ventures with Indian partnership to avail of the benefit.
Vrishti Beniwal in New Delhi
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