Implications on Indian company paying the dividend to a foreign company/ individual

Implications on Indian company paying the dividend to a foreign company/ individual-

Indian company is required to deduct tds u/s 195 read with section 115A which prescribes rate of 20% (plus applicable surcharge and cess).

However, in case the non-resident or foreign company avails the benefit of DTAA, applicable tds rate would be the rate specified in the DTAA.

Rate of tax specified in DTAA of India and USA are:-

? 15% incase foreign company or non-resident individual holds 10% or more voting share in the Indian company paying the dividend.

? 20% in all other cases.

Sec 206AA which states that incase the deductee fails to furnish his pan, withholding tax rate applicable would be higher of the following :-

(i) The rate specified in the relevant provision of this Act; or

(ii) The rate or rates in force (i.e., the rate prescribed in the Finance Act); or

(iii) The rate of twenty per cent

Case-1 When PAN is submitted by the non-resident or foreign company:-

? Rate of tax applicable would be 15% or 20% i.e., the beneficial rate as per DTAA.

Case-2 When PAN is not submitted by the non-resident or foreign company:-

Rule 37BC:- Relaxation from deduction of tax at higher rate under section 206AA

This relaxation is applicable only to non-resident and not to the foreign company, moreover nature of payments prescribed under this rule are of interest, royalty, fees for technical services and payments on transfer of any capital asset, dividend payments have not been specified in this rule. Therefore tds would be required to be deducted at higher of the rates prescribed under section 206AA.

? Rate of tax applicable would be 20% (plus applicable surcharge and cess).

 

Implications on non-resident and foreign company receiving the dividend:-

Foreign company or non-resident is liable to tax on the dividend income earned from Indian domestic company.

? Tax rate on foreign company is 40% plus applicable surcharge and cess.

? Non-resident individuals are taxable at slab rates.

? Special rate of tax specified for dividend income u/s 115A is 20%.

However, foreign company and non-resident can avail the benefit of DTAA which states that Dividend income will be taxable @ 15% or 20%.

? 15% incase foreign company or non-resident individual holds 10% or more voting share in the Indian company paying the dividend.

? 20% in all other cases.

Conclusion-

? More favorable rate of tax for foreign company would be as per DTAA i.e., 15%

? For non-resident it will depend on the total income. That is it could either be slab rate or 15% as specified in DTAA.