Inconsistency in finance Bill 2020 with respect to TDS rate on Dividend paid to Non Residents

? Finance bill proposed to abolish DDT and sought to tax dividends in the hands of Shareholder.

? In case of Nonresident [Including Foreign Company], dividend income is proposed to be taxed at the special rate of 20% as provided u/s 115A (1) of the Act.

? Section 195 of the Act requires person responsible for paying Dividend to deduct TDS at rates in force.

? Section 2(37A) of the Act defines rates in force.  Clause (iii) provides that rates in force, for the purpose of deduction u/s 195, are the rates of income tax specified in this behalf in the Finance Act or rates specified in DTAA.

? Clause 2(5) of Finance bill provides that when tax is to be deducted at rates in force u/s 195 of the act the deductions shall be made at the rates specified in Part II of the First Schedule.

? Part II of the finance bill lays down different rate of TDS for different streams of income, e.g. royalty, Interest, FTS, Capital gains. It also provides that any other income not covered within specific category are subject TDS at the rate of 40% in case of foreign company and 30% in case of other nonresident. This rates should further be increased by surcharge.

? Part II has not been amended to provide specific rate of Dividend. Nonresident covered through Therefore, higher withholding tax rate of 40%/30% as mentioned above would be applicable except for (1) Nonresident Indian and (2) Nonresidents having entitlement of treaty benefits.

? One would argue that withholding tax rate cannot exceed tax liability itself. However, such view would not be free from litigation and company paying dividend may not be inclined to take such view.

? To avoid such unintentional consequence, it is necessary that Part II of First Schedule of Finance Bill is amended while presenting it before Lok Shabha for its approval.

Interplay with section 206AA

? Section 206AA requires TDS to be deducted at rates in force or 20%, w.e.is higher if PAN is not available. Section 206AA (7) read with rule 37CB provides that higher rate of 20% will not be applicable for specified type of payments [Interest, royalty, FTS or Capital Gain] if TRC and other relevant details are provided. Rule 37CB need to be amended to specify dividend payments in this regards. Most of DTAA provide beneficial rate of 5% to 15%. Therefore, Rule 37CB need to be amended to avoid litigation which we have seen earlier on the ground that whether section 206AA supersedes Treaty provision or not.  

? Administrative Issues: Further, TDS requirement on dividend would significantly increase the burden of company paying the dividend in terms of determining residential status, issuance of Form 15CA/CB, Collection of documents for entitlement of treaty benefits [TRC, Form 10F, PAN Number], reporting such transactions in TDS Return.

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