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Replace dividend distribution tax with withholding tax: FICCI

delhi Updated: Jun 27, 2010 17:28 IST

The cost of doing business in India could come down if the Dividend Distribution Tax (DDT) on foreign shareholders is replaced by a withholding tax, industry body FICCI said on Sunday.

DDT is levied by the government on companies based on the dividend distributed to its investors. Withholding tax is levied on income (interest and dividends) from securities owned by a non-resident.

"Under the current system, foreign shareholders are unable to claim credit in the home country for DDT paid in India, resulting in a higher effective tax rate," FICCI said in a statement.

This tantamount to imposing an additional business cost for doing business in India, it added. FICCI said withholding tax makes the foreign shareholders eligible for getting a set-off in his total tax liability in his home country, while DDT does not pass on this benefit and is like double taxation for the foreign shareholders.

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 said.

It suggested a 'split kind of system' whereby DDT is levied on domestic shareholders and withholding tax on foreign shareholders. Else, it said an option be made available to the shareholders to choose between the two taxes.

"The suggestion being tax neutral would not result in a revenue loss to the exchequer," FICCI assured. Further, the industry chamber wants the DDT rate of 15 per cent to be brought down to 10 per cent as was the position prior to 2003. "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 said adding that the cascading impact of DDT needs to be avoided.