1.Back Ground
XYZ Corporation of India Limited (hereinafter referred as “ABC”) has joint venture in XYZ Transmission Company Nepal Limited (hereinafter referred as “XYZ”). ABC holds 26% of equity shares of XYZ. During the financial year 2017-18, XYZ has declared 22.5% dividend on 10th January 2018 which is expected to be received in May 2018. In addition to the dividend, XYZ has also declared Bonus @ 12.5% of face value of shares. The joint venture company (ie. XYZ) has deducted 5% repatriation tax on both i.e. bonus and dividend. Below is the summary of bonus, dividend and repatriation tax: –
All amounts in Nepali Rupees
| Name of the equity owner | Paid up share capital | Bonus Share @12.5% | Cash Dividend @ 22.5% | Repatriation tax @ 5% on Bonus and Cash dividend | Net Dividend payable |
| ABC | 10,40,00,000 | 1,30,00,000 | 2,34,00,000 | 18,20,000 | 2,15,80,000 |
Rajnish Singh & Co, is requested by ABC to provide legal opinion on Tax & Accounting treatment of Dividend & Bonus shares.
2. Analysis
Agreement between the Government of the Republic of India and the Government of Nepal for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (hereinafter referred as “ABC”)has been signed. The provisions of the said ABC shall have effect in India, in respect of income derived in any fiscal yearbeginning on or after the 1st day of April 2013.
The Government of India has notified that all the provisions of the said ABC shall be given effect to in the Union of India with effect from the 1st day of April, 2013.
As per sub section 2 of section 90 of Income Tax Act 1961: –
“(2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub- section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee”
As per the above section, provisions of income tax act or ABC shall apply to the extent they are more beneficial to the assessee.
Article 10 of ABCcontains provisions related to taxation on dividend.
As per clause 3 of article 10 of ABC: –
“The term dividends as used in the article 10 means income from shares, or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.”
ABC provides very extended definition of dividend. As per the ABC, dividend includes other rights, participating in profits as well as income from corporate rights which is subject to same tax treatment. In Nepal, Dividend and Bonus is taxed at the same rate i.e. 5 % Dividend Distribution Tax is applicable on Dividend and Bonus Share Distribution. Hence, Dividend includes bonus.
Let us see the tax treatment of dividend under ABC:-
Clause 1 & 2 of Article 10:-
“1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.
2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed:
(a) 5 per cent of the gross amount of dividends if the beneficial owner is a company which owns at least 10 per cent of the shares of the company paying the dividends;
(b) 10 per cent of the gross amount of dividends in all other cases. This paragraph shall not affect the taxationof the company in respect of the profits out of which the dividends are paid.
According to the above provision, dividend is taxable in the country in which recipient is resident. However, if the recipient is a company owning 10% or more shares of company which is declaring dividend, 5% tax shall be payable in the country in which dividend is dividend distributing company is resident.
Dividend received from an Indian company which has suffered dividend distribution tax is exempt from tax under section 10(34). However, as per section 115BBDA, in the case of a “specified assessee” dividend shall be chargeable to tax at the rate of 10% if
aggregate amount of dividend received from a domestic company during the year exceeds Rs. 10,00,000. Exemption under section 10(34) is granted to dividend received from an Indian company and not to a dividend received from a foreign company. Thus, dividend from a foreign company received by an Indian resident is taxable.
In India, in common parlance ‘dividend’ means the profits distributed by a company to its shareholders. While receipt of Bonus share is not an income but a capital asset.
Head of taxability and applicable tax rate
Dividends are charged to tax under the head “Income from other sources” and hence dividend received from a foreign company is charged to tax under the head “Income from other sources”. Dividend received from foreign company will be included in the total income of the taxpayer and will be charged to tax at the rates applicable to the taxpayer.
Dividend received from a foreign company is charged to tax in India as well as in the country to which the foreign company belongs. If the foreign dividend has suffered double taxation, then the taxpayer can claim double taxation relief either as per the provisions of Double Taxation Avoidance Agreement (if any) entered into with that country (if any) by the Government of India or can claim relief as per section 91 (if no such agreement exists).
Dividend received from a foreign company is taxed in the hands of a resident taxpayer at the normal rates applicable to his income. Normal tax rate applicable to an Indian company is 30% (plus surcharge and cess as applicable), hence, dividend received from a foreign company is charged to tax at 30% in the hands of an Indian company.
However, section 115BBD provides a concessional rate of tax in respect of dividend received by an Indian company from a foreign company in which the Indian company holds 26% or more in nominal value of the equity share capital. By virtue of section 115BBD, dividends received by an Indian company from a foreign company in which the Indian company holds 26% or more in nominal value of the equity share capital is charged to tax at a flat rate of 15% (plus surcharge and cess as applicable).
3.Conclusion
In accordance with above discussions, we are of the view that: –
- Nepali Rupees 2,34,00,000 declared as Dividend is taxable in India in the hands of ABC at the rate of 15% under section 115BBD. 5% repatriation tax paid in Nepal is available as credit under section 90 of the Income Tax Act, 1961. Since ABC pays tax under the provisions of MNO, finally tax on dividend has to be paid at the rate of 18.5% under the provisions of MNO.
- Dividend income can be shown under income from Other Sources and in Books of account, it can be shown as Other Income.
- Receipt of Bonus share is not taxable in India since it is capital receipt. Repatriation tax paid on Bonus share is cost to ABC i.e. no relief can be claim against 5% repatriation tax paid on monetary value of Bonus share. The said tax should be debited in the profit and loss account under the head “Duties & Taxes a/c”. Repatriation tax paid in Nepal shall be treated as Capital expenditure which should be disallowed while calculating income tax under the normal provisions of Income Tax Act 1961. Under the provisions of MNO, there shall not be any adjustment, related to repatriation tax, while calculating assessable income under MNO.
- Bonus share is not accounted. Wherever number of shares in the XYZ are disclosed, it should be shown including Bonus shares.
- Accounting treatment: –
Following accounting entry should be passed for receipt of dividend and repatriation tax paid on Dividend and Bonus share: –
Note: below amounts has to be converted in INR applying the actual forex rate prevailing on the date of activity: –
5% repatriation tax claimable u/s 90 Dr 11,70,000
Duties & Taxes Dr 6,50,000
XYZ Transmission Company Nepal Limited Dr 2,15,80,000
To, Dividend 2,34,00,000
Rajnish Singh & Co
