Finance minister Pranab Mukherjee has brought the world closer to Indian corporates. Keeping in mind the rapid internationalisation of Indian business, following a number of mega cross-border acquisitions like Novelis and Corus, Mukherjee in this year's Budget reduced the tax on dividends received by Indian companies from their foreign subsidiaries by half to 15 per cent. This move for one, is receiving thumbs-up from across India Inc.
At present, when Indian corporates declare dividends, a dividend distribution tax is slapped at 15 per cent. Adding corporate surcharge and cess, the effective rate becomes a little higher at around 16.6 per cent. However, at the hands of the recipient, promoters or individual shareholders, there is no DDT.
But when a foreign subsidiary of an Indian company pays out dividend, there is a 30 per cent DDT on that income. Adding surcharge and cess, the effective rate becomes 33.3 per cent.
"It was heartening to see the finance minister reduce the tax on foreign dividends to recognise the potential of Indian multinationals, as this would encourage more Indian companies to look abroad for growth and bring back the earnings to complete the loop on capital formation," said Koushik Chatterjee, chief financial officer of Tata Steel.
In 2007, Tata Steel made the largest overseas acquisition involving an Indian corporate when it bought Corus for $12 billion.
Agreed D Muthukumaran, head of corporate finance at Aditya Birla Group: "This regulation treats foreign companies in parity with Indian subsidiaries, which would have any way suffered DDT of 15 per cent. This regulation will help companies bring back forex into India."
Hindalco, the flagship of the Aditya Birla Group, recently repatriated $1.7 billion from its overseas arm Novelis, a company it had acquired in 2007 for $6 billion. And as Novelis' financial health improves more remittances to Hindalco will be possible.
Some tax experts feel this proposal will have a limited impact. "This is actually a red herring, as it will be applicable only for a year beginning from April 2012 to March 2013," said Bobby Parikh, managing partner, BMR & Associates.
Others, however, feel this is an experiment. If successful, it will be continued even when the direct tax code regime comes into effect from next year, according to them.
"The optimism stems from the fact that there is global precedence. Even in the US, there was an extension, where the government had created a special window for corporate to repatriate profits at a lower tax rate of 10 per cent as against the prevalent 30 per cent rate," said Uday Ved, tax head at KPMG. Corporates tend to agree.
"Hopefully, this is just a test and will indeed become a permanent clause," said Muthukumaran. According to him, Indian corporates had earlier limited foreign investments. But now, the trend has reversed.
The one-year window, according to most, is predominantly because of the imminent DTC regime that has specific tax clauses related to Control Foreign Corporations.
If there are overseas companies controlled by Indians and if these companies earn passive income in the form of dividends, royalty, rent or interests, then according to DTC guidelines, the income of these companies will be taxable in India at 30 per cent to the shareholders, who control the company in the year of the accrual.
"So, under DTC, you will anyway be able to tax the profit. Therefore, this is just a temporary relief for those companies who have cash lying idle overseas and who want to avail of this window and bring the cash back into India," said Parikh.
For tax and business strategy, most Indian companies float foreign investment companies, which double up as overseas holding companies, under which the underlying special purpose vehicle is housed. The SPV, in turn, controls the overseas asset.
Chatterjee is more optimistic. "We need to see how in the final DTC, the CFC provision gets represented. Also, CFC is only relevant for investment companies and not for those who have underlying operations," he said.
Parikh said ideally corporates should have received tax credits for the underlying taxes suffered on overseas income and even the DTC Bill is still not clear about the credit mechanism.