New Delhi: The Supreme Court Thursday held that the lower 5% withholding tax on dividend income of companies was not available to all
Organisation for Economic Co- operation and Development (OECD) countries just on the most favoured nation (MFN) basis. A bench led by Justice Ravindra Bhatt held that international treaty practices are not enforceable in India unless the government noties them, a ruling
that experts said will have wide ramications for the industry.
"The decision of the apex court will have wide repercussions for the industry and could result in millions of dollars of additional ta revenue for the government," said Amit Maheshwari, tax partner, AKM Global, adding that it could also entail reopening of past cases in form of fresh action by tax authorities.
The top court set aside a 2021 Delhi High Court ruling that allowed Nestle SA, Concentrix Services, Steria and others a concessional withholding tax rate of 5% on dividend income from their Indian arms, extending the MFN clause in the OECD. The court also made it clear that preferential treatment given to a country under a double taxation avoidance agreement did not automatically get extended to other member countries unless the earlier treaty with them was amended.
Experts said other countries could also revisit the position on benets underthese treaties. "Consequently, the other country might also revisit its position before granting Indian companies such benets under the treaty. This would also impact past investments, wherein tax costs (e.g. dividend payouts) would have already been factored in by businesses," said Prashant Bhojwani, partner, Tax & Regulatory Services, BDO India.
India signed a tax treaty with the Netherlands in 1998 where a withholding tax of 10% was allowed. Subsequently, it also entered into treaties with Slovenia, Lithuania, and Colombia where it agreed to a similar benecial rate of 5% on dividend income if the recipient company held 10% or more of the share capital in the Indian company.
Slovenia, Lithuania, and Colombia later became members of the OECD.
Tax authorities sought to apply a 10% rate on the dividend income of companies from the Netherlands, Switzerland, and France. These companies argued that the lower rate of 5% available to companies under the tax treaties with the countries of Slovenia, Lithuania and Colombia must also be applicable to them as all were members of the OECD. They said OECD provides for MFN treatment, making it imperative that if India has signed a treaty with an OECD member that has a lower tax rate, the same will also apply to other members of the grouping.
Source: The Economic Times