Right time for India to abolish Dividend Distribution Tax (DDT), attract FDI: JCCII

NEW DELHI: The Japan Chambers of Commerce and Industry in India (JCCII), the top representative body of Japanese companies in India has said since the world’s two top economies USA and China are caught in the trade war, and global investment, especially from Japan is now skipping China and diverting to Southeast Asian countries; India must take advantage of it and pave the way for the smooth entry of Foreign Direct Investment.

However, it is possible when India takes the necessary steps to make a hurdles-free passage for FDI by addressing issues like ‘Tax on Dividend’ or Dividend Distribution Tax (DDT) and make it consistent with the Double Taxation Avoidance Agreement (DTAA) between India and Japan.

At present, the foreign companies operating in India are liable to pay DDT at the rate of 20.56% on dividend earned over and above the corporate tax and levies that amount to about 35% making the FDI preposition difficult one. And this discourages the world economies from investing in India.

“We have been urging the Indian government since 2015 to implement the Double Taxation Avoidance Agreement between India and Japan (DTAA), also known as the India Japan Tax Treaty in its true spirit and words. Entered in 2006 to promote the investment between two countries by avoiding tax obstacles, the DTAA provisions for a maximum of 10% tax on dividends through withholding tax,” N. Takahashi, the JCCII acting member told Asian Community News (ACN) Network.

As the USA and China and are embroiled in the trade war, and global investment is now diverting from China to Southeast Asian countries, said Takahashi adding that it is a crucial time as well as a good opportunity for India to attract foreign investment and strengthen “Make in India” initiative.

According to Takahashi Japan is the number one foreign investor that brings technology and know-how that is required to make “Make in India” successful in India through Singapore and Maldives top the list in overall investment volume with no technology or know-how transfer.

The impact of DDT has been prompting companies to invest in debt thereby depriving companies of much-needed equity to expand, said Atul Puri, Partner, ShineWing India, a global network of independent accounting and consulting firms.

“Therefore, in order to keep alive the investment and return system of the Japanese investor, it is necessary to consider that DDT should be replaced by withholding tax mechanism to avoid double taxation of income and to pass-on the real benefits of the DTAA signed between India and Japan to benefit the foreign investors,” added Puri.

AS per JCCII, Japan’s investment in India has been in diverse sectors like retail, text, consumer durables, food & beverages and banking and other service sectors, and its cumulative investment in India between 2000 and 2019 was recorded at $ 30.27 billion helping India in making the economic reforms.

JCCII that has been submitting suggestions to the Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce & Industry, since 2009 on diverse issues like taxation, visa, infrastructure, land acquisition, logistics, and finance had first taken up the DDT issue in 2015, and since then it has been reminding the government of it every year.

JCCII also met the Central Board of Direct Taxation (CTBT) officials on January 7 last year. On October 1, the JCCII delegation also met the commerce secretary Mahapatra and handed over the annual JCCII suggestions list. Then in August the JCCII acting member N. Takahashi wrote a letter to the Prime Minister Narendra Modi on the same subject

“In Global scenario, “double taxation” is recognized as the obstacle of the international business relationship to be removed out for the appropriate international business relationship. CBDT itself clearly said “DDT is an additional income tax levied on the payer of the Dividend”, means that CBDT officially declared double taxation of “Income Tax” and “DDT”,” stated N. Takahashi, JCCII acting member in the letter to the Prime Minister adding that this makes huge impact on the companies since for companies return of Investment is dividend.

For Companies with Japan Head Quarters invested in India, DDT has an impact on the Consolidated Balance Sheet/Consolidated Cash Flow of Japan due to the double taxation through DDT.

“Due to the present situation of DDT, the investment and return (dividend) the system does not work well. China turned into economic power by participating in the global open market, enhancing the global commonsense of capitalism and open the market mechanism, of-course there is no double taxation even in China. To realize the global standard as one of the open economic countries, DDT shall be changed into withholding tax system to avoid any double taxation or DDT Exception scheme might be required to consider, just like India-Hungary Tax Treaty” read the letter to the PM.

While supporting the JCCII concern, Atul Puri, Partner ShineWing India admitted that Japanese companies operating in India which are distributing or declaring dividends are liable to pay Dividend Distribution Tax (DDT) at the effective rate of 20.56%.

“This tax is payable in addition to the Corporate Income Tax (CIT) payable on business profits. However, like the Double Taxation Avoidance Agreement (DTAA) between India and Japan, dividend tax shall not exceed 10% of the gross amount of the dividend. But the tax rate on dividend as per the DTAA is not relevant since under the current Indian tax legislation, mostly dividend income from Indian companies that is subject to DDT is exempt from income tax in the hands of the recipient/shareholder. Also, such DDT is not available for the tax credit in the home jurisdiction of the Japanese companies unlike withholding tax,” he added.