Revenue, CEO forum differ

Disagree on taxation of dividends, Double Taxation Avoidance Agreement.

Revenue department officials are of the view that taxation of dividends received from overseas companies in the hands of an Indian resident will not make outward foreign direct investment less attractive.

They added that dividends received from overseas companies by an Indian resident would continue to be taxable in accordance with the rate in force (raised to 15 per cent in the recent Budget).

Officials have also said that a revision of the Indo-US Double Taxation Avoidance Treaty (DTAA) to include taxes, federal social security and deduction for expenses on medicine, is not doable. In India, there is no social security tax and the same cannot be covered under the DTAA, which relates to taxes on income.

These two issues were part of the recommendations of the India-US Chief Executive Officers Forum, which were submitted to Planning Commission Deputy Chairman Montek Singh Ahluwalia during the visit of US President George Bush to India last year. While many of the demands were settled, the tax-related issues had not met the approval of revenue department officials, added sources.

The existing provisions of Section 10(34) of the Income Tax Act, 1961, exempts income by way of dividends referred to in Section 115-O from the taxable income in the hands of the recipient. However, Section 115-O specifically refers to dividends distributed by domestic companies and does not cover dividends distributed by foreign companies.

Also, the dividend declared, distributed or paid by a foreign company is not taxable under Section 115-O and unlike a domestic company, a foreign company does not pay tax to the Indian exchequer at the time of such declaration, distribution or payment of dividend. Therefore, the dividend received by an Indian company from a foreign one is taxable in India.

Officials are of the view that allowing further exemption to the recipient "" the Indian resident"" on the same amount is not feasible.

Also, the issue of taxation of dividends of an Indian investor in a company overseas is determined by the domestic law of the country in which the investment is made. Only in cases where there is no withholding tax in the source country on dividends, the Indian investor will have to bear the tax payable here.