The Budget earlier this year announced a 20% withholding tax on
dividends paid to FPIs.
A recent Supreme
Court ruling on the 1996 Cricket World Cup could have implications for foreign
portfolio investors.
The ruling held
that provisions for deducting tax at source will apply even to those covered by
tax avoidance treaties. The Budget earlier this year announced a 20 per cent
withholding tax on dividends paid to FPIs. Taken together, it may mean FPIs
cannot seek treaty protection against the new withholding tax that companies
are required to deduct at source, according to experts. The apex court order
pertains to when the cricketing bodies of Pakistan, India, and Sri Lanka formed
a joint committee to conduct the 1996 Cricket World Cup. The panel had made
certain payments overseas as part of the tournament.
“India, Pakistan,
and Sri Lanka were selected, on the basis of competitive bids, to have the
privilege of jointly hosting the 1996 World
Cup. These three host countries were required to pay varying amounts… in
connection with conducting the preliminary phases of the tournament and also
for promoting the game in their respective countries,” noted the order.
The tax department
later said it should have deducted taxes for the same. The final Supreme Court
order on the matter came on April 29, where it ruled in favour of the tax
authorities while also noting that a Double Taxation Avoidance Agreement (DTAA)
cannot shield investors from a withholding tax.
“The obligation to
deduct tax at source under Section 194E (of the Income-tax Act) is not affected
by the DTAA and in case the exigibility to tax is disputed by the assessee on
whose account the deduction is made, the benefit of the DTAA can be pleaded and
if the case is made out, the amount in question will always be refunded with
interest. But, that by itself, cannot absolve the liability under Section
194E,” it said.
