H P Agrawal: Double taxation and its return

FOREIGN ENTERPRISES

The large number of tax treaties that India has signed with other countries invariably provide for elimination of double taxation. In fact, the major objective of entering into bilateral tax conventions is to provide for the manner in which each contracting state undertakes to relieve an enterprise from double taxation.

The idea is to ensure that the same income is not subjected to tax in two countries. If, therefore, a particular income is taxed in India and is also taxable in the country of the residence of the taxpayer, the taxes paid in India would be allowed as a credit against the tax payable on that income in the taxpayer's country of residence.

In the above context, the income by way of dividend stands in a peculiar position. The dividend is generally taxable both in the country where it is declared and also in the country where it is received.

Therefore, the credit for tax paid in the former state will normally be allowed as a credit against the tax payable on the said dividend income in the other state.

In several cases, the tax treaties provide that where a foreign enterprise holds a minimum specified percentage of shares in the Indian company paying dividend, the foreign enterprise will be entitled for a tax credit in its country of residence not only for the amount of tax paid in India on dividend income, but also for the proportionate tax paid by the Indian company on its profits out of which dividend is declared.

Tax credit will, however, be available only against dividend income. The countries where tax credit against taxes paid by Indian dividend paying companies is available are Australia, China, Japan, Mauritius, Singapore, Spain, United Kingdom and United States of America.

In this regard a special mention is necessary in respect of tax treaty between India and UK and between India and USA.

Article 24 (1)(b) of Indo-UK treaty provides that in case of a UK company owning at least 10 per cent of the voting stock of a company which is resident of India and from which the UK company receives dividend, the income tax paid in India by the Indian resident company in respect of the profits out of which the dividends are paid shall be allowed as a credit in UK against the UK tax on the said dividend income. Similar provisions exist in Article 25 (1)(b) of Indo-US tax treaty.

In this manner, in case of the UK or US subsidiaries in India, the income-tax paid by such subsidiaries is allowed as a credit against the tax payable by UK or US holding companies. This provision ensures that subsidiaries set up by the UK or US companies in India can operate without being subjected to double taxation.

Unfortunately the converse is not true. In other words, when an Indian company sets up a subsidiary in the UK or USA, the tax paid by such subsidiary in UK or USA is not allowed as a credit against the tax payable by Indian parent company on dividend income received by it from its subsidiary in UK or USA.

This anomalous situation has hindered the growth of Indian subsidiaries in the UK and US, which is rather important to promote export of services from India to these countries.

The Indian government should take up the aforesaid issue with the Competent Authorities in the UK and US, so as to avoid this unhealthy discrimination against Indian subsidiaries.

agar@nda.vsnl.net.in