FPIs stare at higher withholding tax on dividends owing to tax treaty

While FPIs are also classified as non-residents, the withholding tax rates for these are provided under a separate section 196D of the Income Tax Act

Foreign portfolio investors (FPIs) may have to pay a higher withholding tax on dividends received though their final liability may be lower owing to tax treaty arrangements. Companies may withhold tax at the rate of 20 per cent plus surcharge and cess on the dividend paid to FPIs even if they invest from a jurisdiction that provides for a lower rate based on India’s double taxation avoidance agreement (DTAA) with that country.

The Budget had created an uncertainty regarding the quantum of tax that had to be withheld on dividends paid to non-residents. This was because the exact tax rate