India: Interim Budget Does Not Include Renewal of Preferential Treatment of Dividends Received from Overseas Subs
On February 19, 2014, India’s Lok Sabha passed the Interim Budget for the financial year 2014-15 without any significant discussion. Finance Minister P Chidambaram introduced the Appropriation Bill and the Finance Bill by a voice vote. With general elections scheduled for later this year, this budget addresses the allocation of funds for government administrative expenses until the new government presents a full budget.
Among the notables for HSP customers: the budget does not renew preferential treatment for dividends received from overseas subsidiaries. As a result, the tax rate will increase for such dividends received by Indian companies and their onward distribution to shareholders. See the following summary from the Times of India for additional specifics:
Proposal - Surcharge at 10% for domestic companies and 5% for foreign companies (such as branches of foreign companies) where total taxable income exceeds Rs 10 crore to be retained
Impact - The effective corporate tax rate for such domestic companies continues at 33.99% and Minimum Alternative Tax (MAT) at 20.96%. For foreign companies in this income criterion corporate tax rate continues at 43.26%
Proposal - Surcharge at 10% on dividend distribution tax continues
Impact - The effective rate of dividend distribution tax remains at almost 17%. Large dividend tax-paying companies include ONGC, Coal India, TCS, ITC, NTPC to name a few.
Proposal - Dividends received from foreign subsidiaries by India Inc were taxed at concessional rate of 17% for financial year 2013-14. This concessional rate doesn't seem to have been extended.
Impact - Repatriation of dividend to India will now be costly. Until further clarity or revision in the full budget, dividends from foreign subsidiaries by India Inc will be taxed at full corporate tax rate of 30% plus applicable cess and surcharge.
Proposal - Sunset clause for claiming deduction under Section 80-IA to power-sector undertakings doesn't seem to have been extended beyond 31 March 2014
Impact - It appears that tax holiday for companies in generation and distribution of power, transmission or distribution lines and renovation and modernization of existing lines won't be available from April 1, 2014.
(Note: The full-fledged budget could revise the tax rates and provisions)