The Finance Bill, 2002 seeks to amend Section 115AC of the Income-tax Act to cover instances of re-issue of depository receipts which had been converted to shares by the earlier depository receipt holders (dual fungibility) as well as an offer for sale, more commonly referred to as sponsored issues.
With the amendment, dual fungibility and sponsored issues will now be covered under this Section.
As a result, non residents holding ADRs/ GDRs would benefit from the lower tax rates stipulated in Section 115 AC. For instance, the total tax on dividends would be only 10 per cent as opposed to the higher slabs that domestic investors would be subjected to.
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Pranav Satya, director, Ernst and Young, tax consulting and compliance said: "The amendment seeks to provide the same exemptions which were available under the original section to primary issuances of ADRs/ GDRs against issue of fresh shares".
Deanne D'Souza-Moni, head, (corporate and securities practise) at Nishith Desai Associates & Co, added that "Some implications of this move are that, due to this amendment, holders of such depository receipts will now be able to be avail of paying dividend tax at the rate of 10 per cent only."
With the government having recently permitted dual fungibility of ADRs/GDRs, fresh depository receipts could be issued to the extent of the ADRs/GDRs that had already been converted into shares by the earlier depository receipt holders. Such re-issued depository receipts will also now be eligible for reduced tax rates under the amended Section 115AC.
However, the amended Section 115AC does not make a distinction between listed and unlisted companies unlike the guidelines issued by the Ministry of Finance (MoF) for issue of ADRs/GDRs against existing shares (i.e. offer for sales).
Under the guidelines issued by the MoF, it is required that a company must be listed on the domestic bourses in order to be eligible to issue depository receipts against existing shares.
This could have a bearing on companies like Rediffusion and Satyam Infoway which are listed in international bourses but which are not listed on domestic exchanges.