Indian Chamber Calls For Overhaul Of Cross-Border Taxation

by Lorys Charalambous, Tax-News.com, Cyprus

25 October 2005

The Indian Chamber of Commerce (FICCI) has urged the government to undertake a thorough review of the taxation of dividends and capital gains earned by foreign subsidiaries of Indian companies to encourage more firms to repatriate profits, and make vital investments in the country's infrastructure.

As the Indian finance ministry and various industry groups prepare to enter into pre-Budget consultations, FICCI has proposed amendments to the Income Tax Act which would either exempt dividends and capital gains earned by foreign firms in which an Indian company has an equity interest of 10% or more, or tax them at a concessional rate of between 5% and 7.5%. Currently, such earnings are taxed at 20%.

"In view of the fact that India requires huge amounts of investment in core and infrastructure sectors, namely, energy, telecommunications, water supply and distribution, roads, housing, FICCI feels that the wealth created by business of Indians in various countries needs to be channelised in a proper manner for stepping up the pace of economic development in our country," FICCI noted in a statement.

The organisation is also calling on the finance ministry to apply a uniform 10% tax rate on all income earned by non-resident Indians (NRIs). While a 10% rate of tax applies on fees for technical services and royalties in respect of arrangements entered into since June 1, 2005, FICCI believes that tax rates of 20-30% under the domestic tax laws are "unrealistic", as this assumes a profit margin of 50-60% of revenue.

FICCI observed that this measure would bring the taxation of NRI dividend income into line with certain tax treaties which apply a 10% withholding tax on such income, such as the agreements with Ireland, Germany and Sweden.

Recommended