But the stringency of India’s income tax law must give way to the Double Taxation Avoidance Agreement (DTAA) with the country to which a non-resident is taxed. The Indo-British DTAA provides that dividends paid by a company which is a resident of one Contracting State to a resident of the other Contracting State may be taxed in that other State. In simple terms, a UK resident does not have to pay tax to the Indian government on dividends from Indian companies, but he has to pay tax on them to the UK Treasury.
So what is the fuss about Article 9 as the powerful nations of the world agree to favorable terms for all contracts including DTAA. Ultimately, if a large UK investor receives a dividend from India, they are not liable to tax in India on that dividend. Why do we genuflect before Western nations is a million dollar question? Whatever.
It goes without saying that DTAA does not mean that we can thumb our noses at both countries. Akshata might have magnanimously offered to pay taxes to the UK government on his Infosys dividend, among other things, despite his non-resident status, but the question is who owns his Infosys dividend income? . Seems to be under Indian jurisdiction. It is not up to her to choose where she wants to pay her taxes. The law will decide.
And the law is clearly on the side of the Indian government. She is not a resident of the UK; ergo the Indo-UK DTAA has no hold. If this is true, Infosys should have deducted withholding tax from its dividend assuming that is not the case. She might have sued for peace with the British opposition and strident media, but the Indian government should follow the letter of the law and the DTAA and not the constraints of realpolitik in the UK.
However, the more important issue is why our DTAAs rely on the economic power of the interlocutors. What the Indo-British DTAA implies is that if Unilever has huge stakes in its Indian subsidiary, the dividend the former receives from the latter would not be taxable in India but only in the UK. So much for the source of taxation rule that India swears by!
— S. Murlidharan is a CA by training and writes on economic issues, tax and trade laws. The opinions expressed in the article are his own.
(Edited by : Ajay Vaishnav)