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Cash flow relief: FPIs granted breather on dividend taxation in Budget Last year's Union Budget had created uncertainty regarding the amount of tax that had to be withheld on dividend paid to non-residents
The Union Budget has rationalised the tax on dividends for foreign portfolio investors (FPIs), bringing it at par with treaty rates, which could be lower than the 20 per cent tax rate applied today. Last year’s Union Budget had created uncertainty regarding the amount of tax that had to be withheld on dividend paid to nonresidents. This was because the exact tax rate was not specified under Section 195, which covers tax deducted at source (TDS) or withholding tax for non-residents.
The Finance Act, 2020, had clarified that a withholding tax rate of 20 per cent plus surcharge and cess be applied for dividends paid to non-residents under Section 195. Also, lower rates could be applied for residents coming from jurisdictions with which India has entered into a double tax avoidance agreement (DTAA). But while FPIs are classified as non-residents, the withholding tax rates for these are provided under a separate Section, 196D, of the Income Tax Act. This Section specifies a rate of 20 per cent (plus surcharge and cess) on dividends paid. However, it does not provide for a lower withholding rate even if the FPIs’ tax liability is a reduced one on account of an existing tax treaty...Read More