How to avoid double taxation in India

Clauses explained about most favoured nation status countries

By H. P. Ranina/NRI Problems

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Published: Wed 8 Nov 2023, 4:02 PM

Question: I work for a company registered in the Netherlands, which has invested in the share capital of an Indian subsidiary company. A dividend has been declared by the Indian subsidiary. I want to know what would be the rate of tax applicable that would be withheld by the Indian company while remitting the dividend.

ANSWER: Netherlands is one of the countries with which India has entered into double tax avoidance agreement which has a most favoured nation clause. The other countries with a similar MFN clause are Slovenia, Lithuania, France, Switzerland and Sweden. All these countries are members of the OECD. According to the MFN clause, if a lower rate of withholding tax on dividend, interest, royalties or fees for technical services is prescribed in a tax treaty, which India enters into with another OECD member country, the lower rate of tax would be applicable in case of all the OECD countries which have a MFN clause. In the Indo-Slovenia tax treaty the rate of tax prescribed is five per cent. The Supreme Court of India has recently held that the lower rate of five per cent will be applicable in the case of a Netherlands-based company only when a notification is issued by the Indian Government. The Supreme Court has reversed the decision of the Delhi High Court which held that the MFN clause is triggered automatically and the lower rate of tax is applicable as soon as India enters into an agreement prescribing a lower rate of tax. Therefore, on the facts of your case, the lower tax rate of five per cent would be applicable in the case of the Netherlands company only when the Indian government issues a notification.

Question: When a businessman wants to take a loan from an Indian bank, a lot of documentation is involved. Is there scope for streamlining the procedural hassles?

ANSWER: Large borrowers inevitably have to execute several documents not only in India but all over the world. However, India is easy on documentation by providing unsecured loans to medium, small and micro enterprises. During the current year, the loan demand from micro-, small and medium enterprises (MSMEs) has increased especially from smaller cities. There has been a 73 per cent year-on-year growth for unsecured loans. This is due to a robust digital public goods infrastructure and a new data ecosystem powered by credit bureaus. The expansion of the goods and services tax network embracing small businesses has also resulted in a higher flow of credit to the MSME sector. Further, under a new scheme announced by the government, street vendors are given collateral free loans upto a certain limit. This has led to financial empowerment of the weaker sections of society.

H. P. Ranina is a practising lawyer, specialising in tax and exchange management laws of India.
H. P. Ranina is a practising lawyer, specialising in tax and exchange management laws of India.

Question: There is a lot of hype about improving the lot of women in India. Have any concrete steps been taken in this direction?

ANSWER: The main thrust of the government’s policy is to provide equal opportunity and make available basic necessities for women in India. In respect of new houses which have been constructed, about 27 per cent of such houses are registered in the name of women while 69 per cent are in the joint names of the husband and wife. A scheme has been formulated whereby each woman will earn annually at least Rs100,000 through skilled jobs provided by self help groups. Women are trained for manufacturing several items, including LED bulbs, plumbing services and operation and repair of drones. About 90 million women are covered under this scheme. Further, micro credit is provided through bank accounts opened in the name of women. As of August 2023, 56 per cent of all new bank accounts are operated solely by women. Special insurance packages have been devised to cover the needs of women and for marriage expenses of daughters.

H. P. Ranina is a practising lawyer, specialising in tax and exchange management laws of India.

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