India Tax Alert - March 4, 2008 - International Tax

By N.C. Hegde and C.A. Gupta

The 2008 India Budget announced 29 February 2008 does not contain many measures benefiting companies. There are no changes proposed to the 30% corporate tax rate (40% for nonresident companies) or the 10% surcharge (2.5% for foreign companies) where income exceeds INR 10 million. However the rate of service tax has been kept unchanged and the new services that have been brought within the scope of the service tax have, unlike previous years, been few.

The most notable change for companies announced in the budget is a change to the dividend distribution tax (DDT), a tax on distributed profits, payable by domestic companies on dividends paid out of current or accumulated profits. The DDT rate is 15%, plus the 10% surcharge and a 3% education cess. According to the budget proposals, an Indian parent company will be allowed to set off dividends received from its Indian subsidiary against dividends distributed by the parent when computing DDT liability. However, the following requirements must be met to benefit from the credit:

The Indian parent company may not be a subsidiary of another company;

The Indian subsidiary must have paid DDT on the dividends distributed to the Indian parent; and

The Indian parent must hold more than 50% of the nominal value of the equity share capital of the subsidiary.

The proposed amendment will take effect retroactively from 1 April 2008.

The setoff of dividends received from a subsidiary against DDT paid by the parent company is a step in the right direction, although foreign entities having a two-tiered structure in India may face difficulties in qualifying for the benefit.

Other Changes

Capital Gains: The short-term capital gains rate on gains derived by non-residents (including Foreign Institutional Investors) will be increased from 10% to 15%.

Securities Transaction Tax: The rate of the Securities Transaction Tax will remain unchanged and tax paid in respect of taxable securities transactions entered into during the course of business will be allowed as a deduction when computing taxable business income.

Service Tax: The rate of the Service Tax has been maintained at 12% but the following categories of taxable services have been brought within the purview of Service Tax:

Information technology software services;

Internet telecommunication services;

Recognized stock exchange services;

Commodity exchange services;

Processing and clearing house services;

Supply of tangible goods for use services; and

Investment management service under ULIP.

Banking Cash Transactions Tax: The Banking Cash Transactions Tax will be abolished as from 1 April 2009.

Administration: The due date for filing a tax return in the case of a company and a person (other than a company) whose accounts are required to be audited under the Income Taxes Act or any other law or a working partner of a firm whose accounts are required to be audited will be 30 September rather than 31 October.

The person responsible for making payment to a nonresident will be required to furnish information in such form and manner as may be prescribed by the Indian authorities.

For additional alerts, visit the Global Tax Alerts archive.