FPIs bat for common platform to avail Budget benefit on dividends

Tax consultants and custodians are also putting heads together to standardise the kind of documents needed to be furnished by FPIs, which can be acceptable to all companies

A clutch of foreign custodians have reached out to the depositories to allow foreign portfolio investors (FPIs) to upload details for availing lower withholding tax on dividends received at the depository account level.

The aim is to enable companies to download the requisite information directly from the depositories or from their registrars, making it easier for them to withhold tax after taking into account treaty benefits as applicable.

Tax consultants and custodians are also putting their heads together to standardise the kind of documents that need to be furnished by FPIs, which can be acceptable to all companies. Other than a tax residency certificate, FPIs will also provide an undertaking with respect to beneficial ownership and a declaration of no permanent establishment to the depositories.  

The CBDT is yet to issue any clarification on the type of documents required to avail of lower treaty rates on dividends paid, and as it stands, the requirement may vary from company to company.

"Considering the number of companies listed on the exchanges and the number of FPIs, it would be a huge operational task for investors to provide relevant documentation to companies or their registrars, and similarly for companies to collate the information and custodians/investors to discharge their withholding obligations," said the note sent by custodians to depositories.

At present, companies write to custodians at the time of declaring dividends. The custodians, in turn, reach out to tax consultants for the relevant documents for each FPI, which is then passed on to all the companies it has invested in. This process is time-consuming.

"The current process of confirming the residential status of each foreign investor for each company is cumbersome. Just like KYC documents are uploaded with central agencies like KRAs for common access, a similar database on documents required for TDS on dividends that can be accessed by any company, would go a long way in easing the TDS process," said Sunil Gidwani, partner, Nangia Andersen.

Indian companies withhold tax at the rate of 20 per cent (plus surcharge and cess) on the dividend paid to FPIs. This year's Budget has allowed these investors to avail of lower rates of 5-15 per cent based on India’s double taxation avoidance agreement with the particular country.

Companies wanting to consider treaty benefits and deduct tax at a lower rate, however, will have to examine a host of qualitative factors, including whether the investor is the beneficial owner of the dividend income. Indian tax authorities in the past have ruled an entity as not being a beneficial owner of dividend income. Besides, there are concerns that tax authorities may levy interest or penalty on firms for short deduction of tax.

"Uploading withholding-related data at a central database will make it more accessible to companies. But the larger question that remains is whether companies will give the treaty benefits to FPIs from a TDS perspective? That call still has to be taken by the individual companies," said an official from a tax consultancy.

Companies have been hesitant to consider treaty provisions and deduct tax at a lower rate provided in the treaty, especially after the Supreme Court ruling in the Pilcom case last year. The apex court had held that where the Income-Tax Act provides for a specific withholding tax rate on payment to non-residents, the payor is required to comply with the same, irrespective of the final tax position of such non-resident recipient under the applicable tax treaty.

Rationalising TDS on dividends will provide a big cash flow relief for FPIs. It will also do away with the need for FPIs to claim credit for excess taxes withheld by the Indian companies, adjusting it against their aggregate annual tax on all sources of income or claiming it as a refund.

• Documents to be furnished for lower TDS
• Self-attested PAN copy
• Tax residency certificate issued by relevant authorities from country of residence
• Form 10F
• Self-declaration that includes certification of residence, no permanent establishment and undertaking with respect to beneficial ownership