Akshata Murthy-Rishi Sunak Uk Tax Smash: The elephant in the room is India’s weak double taxation avoidance deal

Akshata Murthy, daughter of Infosys founder Narayana Murthy and wife of UK Chancellor of the Exchequer Rishi Sunak, has been in the eye of the storm. The accusation is that she has significant overseas income, including dividends from her 0.93% stake in Infosys and does not pay tax on them, posing as a non -resident. It now turns out that she has volunteered to pay taxes to the UK Treasury on her foreign earnings, although, strictly speaking, she may not have to. Her husband feels the relentless heat of the heckling for not disclosing the family’s assets, as he is compelled to do so especially since he is Caesar’s wife and holds the august office of chancellor of the ‘Chessboard. The belated magnanimity to pay the tax, although not required in his view, may therefore be demagoguery. Whatever.
India, which shaped most of its laws after its former ruler and the UK contacted the world or worldwide income of a resident for taxation. The opposition in the UK says its declaration of non-domicile status in the UK is an afterthought to counter the heavy UK income tax on its bountiful foreign income, including its Infosys holdings.
Section 9 of the Indian Income Tax Act states that the dividend payable by an Indian company shall be deemed to arise in India, period. The implication is that no matter where you live or receive such dividends, they are taxable in India. A mandatory law indeed. But then the whole tenor of article 9 is as follows: if you earn your income abroad, which is not possible without its connection with India, you are taxable in India. This is how capital gains from disposal of shares of Indian companies are taxable in India regardless of where the transaction is consummated, Cayman Island or Ajanta Caves!

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.

Coming back to Ms Murthy, it should be noted that by her own admission she is not domiciled in the UK where she has only lived since 2015, making her a non-resident. The India-UK DTAA only applies to her if she resides in the UK. If she isn’t, Section 9 is squarely drawn – she has to pay tax on her Infosys dividend income to the Indian government and Infosys will have to deduct withholding tax under Section 195 .

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.

Read his other columns here

(Edited by : Ajay Vaishnav)


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