NEW DELHI: FICCI today asked the government to replace the Dividend Distribution Tax (DDT) on foreign shareholders by a Withholding Tax as it would help reduce

the cost of doing business in India.

"Foreign shareholders are unable to claim credit in the home country for DDT paid in India, resulting in a higher effective tax rate. This is tantamount to imposing an additional business cost for doing business in India," the industry body said. FICCI further pleaded for a ‘split kind of system’ whereby DDT is levied on domestic shareholders and withholding tax on foreign shareholders.

The industry body also suggested that "an option be made available to the shareholders to choose between the DDT and the withholding tax. The suggestion being tax neutral would not result in a revenue loss to the exchequer".

The chamber said, "the DDT on domestic shareholders is seen by industry as a surrogate tax paid on behalf of the shareholders. Its cascading effect in multi layered corporate entities and high tax rate of 15 per cent is seen as a major irritant in corporate financial restructuring and engineering."

It noted that Section 115-O dealing with tax on distributed profits of domestic companies, provides that any amount declared, distributed or paid by any domestic company by way of dividends will be charged to additional income tax "called Dividend Distribution Tax (DDT) at the base rate of 15 per cent".

Dividends are distributed out of after tax profits, tax having been already paid by the respective companies, and thus DDT tantamount to double taxation, which must be avoided. FICCI suggested that instead of 15 per cent, the DDT rate should be reduced to 10 per cent as was the position prior to the year 2003. It feels that the cascading impact of DDT needs to be avoided. FICCI said, "the ideal solution of the problem would be the revival of section 80M which we had till March 31, 2004 in our Income Tax Act."

Under this section, where the gross total income of a domestic company, in any previous year, included any income by way of dividend from another domestic company, a deduction was allowed in computing the total income of such domestic company of an amount equal to so much of the amount of income by way of dividends from another domestic company as did not exceed the amount of dividend distributed by the first mentioned domestic
company.

That apart, the benefit of this deduction will not be available to a holding company in India, which is a subsidiary of foreign company. Dividend remittance from overseas subsidiary and associate should be exempted from Indian income tax if the same is already taxed in the source country.