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In FY23, the dividend earned by foreign promoters and other overseas investors was nearly ₹1.24 lakh crore compared to ₹53,600 crore in FY20 or ₹53,500 crore in FY19.
Till FY20, companies were required to pay Dividend Distribution Tax at an effective rate of 20.56%. With liability to pay taxes on dividends earned shifting to shareholders, tax experts said the situation augurs well for multinationals and other companies with promoters registered in tax-friendly foreign jurisdictions. They end up paying lower taxes in such countries with which India has tax treaties.
“Lower tax rates ranging from 5% to 15% can be explored by the foreign promoters or investors if one satisfies certain conditions specified under tax treaties between India and various countries,” said Tapati Ghose, partner of Deloitte India. “In order to avoid double taxation, taxpayers may also claim foreign tax credits in the overseas jurisdiction for the taxes paid on dividend income in India.”
For instance, 3M India, a subsidiary of US-based 3M Company, which had not paid dividends in the past 20 years, paid an 8,500% dividend in FY23. Foreign promoters held 75% in the company. Britannia Industries, in which foreign promoters own 50%, paid 7,200% divided in FY23 compared to 3,500% in FY20 and 1,500% in FY19. Bosch, the Indian subsidiary of German engineering and technology company, increased its payout to 4,800% in FY23 from 1,050% in FY20. Similarly, HUL has increased its dividend to 3,900% in FY23 from 2,500% in FY20.CRISIL, a subsidiary of S&P, has increased it from 3,200% to 4,800% during this period.
Dividend income received by foreign portfolio investors, non-resident Indians, and multinational companies is taxable at the rate of 20% with an additional surcharge at the applicable rates and a higher education cess at 4%. Meanwhile, domestic investors falling under the highest tax slab pay a tax of as much as 42.7% on dividends.“To milk the benefit to the maximum, subsidiaries of MNC companies have increased the dividends manifold,” said Ravi Sardana, an investment banker. “This has created a peculiar situation where Indian investors are subsidizing foreign investors and MNC parents while the country is losing precious foreign exchange.”
Vedanta, which paid a 390% dividend in FY20, declared a 10,150% dividend in FY23. Promoters registered abroad held a 68.11% stake in the company.
“Dividends are a good way to reward shareholders. While some individuals are in the highest tax bracket, most shareholders do not cross the tax threshold,” said Amit Tandon, the founder of proxy advisory firm Institutional Investor Advisory Services India (IiAS).
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