The Associated Chamber of Commerce and Industry of India (ASSOCHAM) has suggested insertion of a provision in new Draft Tax Code (DTC) to enable recipients of dividends and capital gains, arising on sale of shares in foreign companies, in which Indian entity has more than 10% equity stake be fully exempted from Income-tax. earnings
In its Post Budget Memorandum submitted to the Finance Minister, the ASSOCHAM President, Dr. Swati Piramal has stated that taxation laws of countries like Netherlands, Denmark, Belgium, Spain, Switzerland, Luxembourg and Malaysia which contain extremely attractive provisions need to be followed by Indian government.
These governments fully exempt dividends declared by investee company within their jurisdictions as also free capital gains, arising on sale of shares of investee company in which investor company has more than 10% equity interest from income tax in hands of investor company.
Therefore, the suggested provision if accepted will help Indian entrepreneurs in bringing back their foreign exchange income, earned outside India back to their home country, which will be invested in productive avenues and also lend stability to exchange rate of Indian rupee.
In cases where participation exemption rules are not applicable, the parent – subsidiary Directive of the European Union prevents EC Member States where parent companies are established from taxing profit distributions received from companies established in other EC Member States as well as capital gains arising on the sale of shares of these companies, if the parent company holds more than 5%-10% equity interest in the other company.
Dr. Piramal pointed out that exchange Control Regulations in India have undergone a change in the recent years and regulations for Indian companies to set up subsidiaries abroad have been considerably relaxed. This factor coupled with globalisation of Indian economy has lead to a number of Indian companies establishing subsidiaries outside India to improve their business in international markets.
Recent experience has shown that Indian industry is becoming globally competitive and is fast making in-roads into the European and US markets and this has necessitated setting up of subsidiaries/joint ventures to cater to those markets in a more effective manner. This phenomena is very much evident in the information technology, pharmaceutical sectors and more recently the telecommunication also where a number of leading corporates have established subsidiaries abroad.
However, these companies are reluctant to bring back the profits earned by their foreign subsidiaries in the form of dividends paid to their Indian holding companies, since the said dividends are taxable in the hands of the Indian holding companies at the high rate of tax of 35%.
Similarly, the Chamber Chief said, the Indian holding companies do not also repatriate the capital gains which can be earned by them by selling the shares of the foreign subsidiaries, since the same will be taxed in India at 20%.
India requires huge amounts of investment in core and infrastructure sectors, namely, energy, telecommunications, water supply and distribution, roads, housing etc. One of the important sources of funds for this purpose is the wealth created by Indian businesses in other countries. It is of prime importance that this source of funds is channelised in a proper manner for stepping up the pace of economic development in our country.
Source: http://www.assocham.org/prels/shownews.php?id=2391.
