Tax cloud over IFSC dividend payout

Tax cloud over IFSC dividend payout

DDT waiver only on what is paid from current income, not accumulated profit; experts say Centre should clarify

There is concern that a portion of the dividend to be declared by companies operating out of the International Financial Services Centre (IFSC) could come under the tax net.

The central government had announced various tax sops for new businesses engaging in financial services at IFSC, set up at GIFT City in Gujarat. Among these, waiver of dividend distribution tax (DDT) on profits distributed by IFSC companies was considered a major relief, as it would help them to repatriate profits without additional cost to the business.

However, the waiver has been provided for dividend distributions made by IFSC companies only from current income. The present company law provisions, which apply to companies set up at the IFSC, permit declaration of dividends out of accumulated profits.Given these, companies could potentially bifurcate the amount of dividends paid out of current income and accumulated profits. To the extent dividends are declared out of the latter, they will have to pay DDT at about 20 per cent.

According to experts, since IFSC is at a nascent stage, companies setting up there would plough back their profits for expansion in the initial years and might declare dividends at a later stage. At that stage, they might want the flexibility to declare dividends out of accumulated profits as well. Profits not paid as dividend and carried over into the accounts of the following year are regarded as accumulated profits.

The ambiguity could impact service providers operating out of the IFSC, especially brokers which have set up shop in the region and moved their proprietary desks there. "We are competing with geographies such as Singapore and Hong Kong, where there is complete transparency and clarity on tax issues. The government would do well to shed light on the issue," said Alok Churiwala, a broker.

In general, dividends paid by a domestic company operating outside the IFSC are subject to DDT of 15 per cent of the aggregate dividend declared, distributed or paid. This tax is applicable whether these are paid out of current income or accumulated profits.Further, there is a surcharge of 12 per cent on DDT and education cess of three per cent. The effective DDT at present works out to 20.3 per cent.

"IFSC has significant growth potential and is expected to evolve into a self-sustaining financial ecosystem over time. It is very unlikely that the government intends to restrict the DDT exemption in any manner. However, clarity on this point will be welcome," said Suresh Swamy, partner at consultancy PwC India.

It must be noted that there is lack of clarity on the taxation of eligible foreign investors (EFIs) as well. Experts believe the income earned by EFIs from trading on the IFSC exchanges could be classified as business income, which could lead to a hefty tax outgo of 40 per cent plus surcharge and cess.

This is because while income earned by foreign portfolio investors through Indian securities, including trading on IFSC exchanges, is treated as capital gains, the Income Tax Act does not provide similar treatment to the income earned by EFIs, investors not registered as foreign portfolio investors.

The government has already announced several concessions for IFSC investors, including exemption from paying the securities transaction tax, commodities transaction tax and stamp duty. The Union Budget also announced a unified regulator for IFSC.

The Business Standard, New Delhi, 07th March 2018