10% Tax On Foreign Firms Distributed Profits Under Review

Union finance minister P Chidambaram yesterday disclosed that he has referred the issue of imposition of the 10 per cent tax on distributed profits proposed in the budget to the revenue secretary N K Singh for review.

Taking cognizance of numerous requests received by his ministry, primarily from foreign companies which have petitioned that such a tax is unfair to foreign investors, Chidambaram assured a crowded session of an international business conference that the Finance Bill could even be amended to correct any anomalies. The three-day conference is being organised by the CII, Dow Jones and the Asia Society.

Chidambaram, who was replying to a query raised by a senior executive from Enron International said: If there are any amendments needed in this aspect, we will include this in the Finance Bill. The Enron executive had said that the proposed dividend tax on corporates placed foreign companies at a disadvantage vis-a-vis domestic firms.

The minister, however, clarified that such an amendment would be done only after detailed calculations are made to work out the net effect on multinationals of the proposed tax on distributed profits and the reduction of withholding tax on royalties.

The Union budget had proposed to reduce the withholding tax on royalty payouts to parent companies of multinational subsidiaries in India from 30 per cent to 20 per cent.

Simultaneously, the finance ministry has proposed a dividend tax at the rate of 10 per cent on undistributed profits which will hit the dividend income repatriation of companies controlled by foreign majors.

Multinational companies, most of which route their equity investments into their Indian subsidiaries through investment companies located in tax havens like Mauritius, see there bottom lines being sharply affected by this new tax.

In the absence of any tax on distributed profits, every foreign company which is based in a tax haven like Mauritius was able to repatriate dividend income to overseas promoters and shareholders completely tax free.

Chidambaram ruled out dropping of tariffs on capital goods imports to zero levels for the time being as the government was committed to protecting the domestic industry. Tariffs have now been reduced to 20 per cent but it is not possible to reduce it to nil, as there is a very strong domestic industry manufacturing capital goods for key sectors, including power.