Dividend Tax Rate Between India and Australia Under DTAA

Dividend Tax Rate Between India and Australia

Under Article 10 of the India-Australia Double Taxation Avoidance Agreement (DTAA), dividends paid by a company resident in one Contracting State to a beneficial owner resident in the other Contracting State are subject to a maximum withholding tax rate of 15% of the gross amount. This represents a significant reduction from India's domestic withholding rate of 20% (plus applicable surcharge and cess) under Section 195 of the Income Tax Act, 1961.

The India-Australia DTAA was originally signed on 25 July 1991 and came into force on 30 December 1991. It has since been amended by a protocol signed on 16 December 2011, which became effective in April 2013. The agreement has also been modified by the Multilateral Instrument (MLI), with the synthesised text published by the CBDT reflecting the combined effect of the original treaty and MLI provisions.

Treaty Rate vs Domestic Rate: Detailed Comparison

Indian tax law imposes a domestic withholding tax rate of 20% (plus surcharge and health and education cess) on dividend payments to non-residents under Section 195 read with Section 115A of the Income Tax Act. However, under Section 90(2), a non-resident can opt for the more beneficial rate available under the DTAA.

Unlike the India-Canada or India-USA DTAAs, the India-Australia treaty does not differentiate between portfolio investors and substantial shareholders. A flat 15% rate applies to all dividend recipients who qualify as beneficial owners, regardless of their percentage of shareholding in the paying company. This simplicity is a distinguishing feature of the India-Australia treaty.

The effective domestic rate, after adding surcharge and cess, can be approximately 20.8% to 21.84% depending on the total income of the non-resident. The treaty rate of 15% therefore offers a clear tax saving of approximately 5-7 percentage points on gross dividend income.

Who Qualifies for the Reduced Rate

To claim the reduced 15% rate under the India-Australia DTAA, the dividend recipient must satisfy several conditions:

Beneficial Ownership Requirement

The recipient must be the beneficial owner of the dividends. This means the recipient must have the right to use and enjoy the dividend income without any contractual or legal obligation to pass it on to another person. The concept of beneficial ownership has been strengthened under the MLI through the Principal Purpose Test (PPT).

Tax Residency

The recipient must be a tax resident of Australia as defined under Article 4 of the treaty. A valid Tax Residency Certificate (TRC) issued by the Australian Taxation Office (ATO) is mandatory to establish this status.

Limitation on Benefits

Post-MLI, the treaty includes a Principal Purpose Test (PPT) under Article 7 of the MLI. Treaty benefits can be denied if one of the principal purposes of an arrangement or transaction was to obtain benefits under the treaty, unless granting those benefits would be in accordance with the object and purpose of the relevant provisions.

GAAR Considerations

India's domestic General Anti-Avoidance Rules (GAAR), effective from April 2017, can override treaty benefits if the tax authority determines that the arrangement lacks commercial substance and was entered into primarily for obtaining a tax benefit.

Dividend-Specific Treaty Provisions

Article 10 of the India-Australia DTAA contains several important provisions specific to dividend taxation:

Definition of Dividends

Under Article 10(4), the term "dividends" means income from shares and other income subjected to the same taxation treatment as income from shares by the laws of the Contracting State of which the company making the distribution is a resident. This definition is broad enough to cover ordinary dividends, deemed dividends under Section 2(22) of the Indian Income Tax Act, and distributions by mutual funds.

Permanent Establishment Exception

The reduced rate under Article 10(2) does not apply if the beneficial owner carries on business through a permanent establishment (PE) in the source state and the shareholding giving rise to dividends is effectively connected with that PE. In such cases, the dividends are taxed as business profits under Article 7 of the treaty.

Source Country Taxation

The treaty explicitly allows the source country (where the paying company is resident) to tax dividends, but limits the rate to 15%. The residence country must then provide relief from double taxation through a tax credit mechanism as outlined in Article 24 of the treaty.

Documentation Required

Australian residents claiming the reduced 15% rate on Indian dividends must furnish the following documents to the Indian payer or their bank:

Tax Residency Certificate (TRC)

A valid TRC from the Australian Taxation Office (ATO) confirming that the recipient is a tax resident of Australia for the relevant financial year. This is the primary document for claiming treaty benefits under Section 90(4) of the Income Tax Act.

Form 10F

If the TRC does not contain all the prescribed particulars (name, status, nationality, tax identification number, period of residency, and address), the recipient must file Form 10F electronically on the Indian Income Tax portal to supplement the TRC.

Self-Declaration

A self-declaration confirming that the recipient is the beneficial owner of the income, does not have a PE in India to which the income is attributable, and that the arrangement is not primarily motivated by tax avoidance.

PAN or Form 10F in Lieu

While having an Indian PAN is not mandatory for claiming treaty benefits, if the recipient does not have a PAN, Section 206AA consequences (higher withholding at 20%) may apply. However, the CBDT Notification No. 53/2016 provides that treaty rates will prevail over Section 206AA rates if the prescribed documents are furnished.

Withholding Procedure for Indian Payers

Indian companies paying dividends to Australian shareholders must follow a specific compliance procedure under Section 195 of the Income Tax Act:

Step 1: Verify Documentation

Before applying the reduced 15% rate, the Indian payer must verify the TRC, Form 10F, and beneficial ownership declaration from the Australian shareholder. The payer bears the responsibility for ensuring that all conditions for claiming treaty benefits are met.

Step 2: Deduct TDS at Treaty Rate

After satisfactory verification, deduct TDS at 15% (or the rate under the domestic law if lower) on the gross dividend amount. The TDS must be deposited with the government within 7 days of the following month.

Step 3: File Form 15CA/15CB

For remitting the dividend to Australia, the payer must file Form 15CA electronically. If the remittance exceeds INR 5 lakh in a financial year, a Chartered Accountant's certificate in Form 15CB is also required, which certifies the nature of remittance, applicable TDS rate, and treaty provisions relied upon.

Step 4: Issue TDS Certificate

The payer must issue a TDS certificate in Form 16A to the Australian shareholder within 15 days from the due date of furnishing the quarterly TDS return.

Common Disputes and Judicial Precedents

Several key issues have arisen in the interpretation of dividend taxation provisions under Indian DTAAs, many of which are relevant to the India-Australia treaty:

Beneficial Ownership Challenges

Indian tax authorities have increasingly challenged treaty benefit claims where the recipient is seen as a conduit or nominee rather than the true beneficial owner. In cases involving intermediary holding structures, the ITAT has examined whether the recipient has the right to use and enjoy the dividend income independently. The Delhi ITAT has upheld treaty benefits where valid TRCs were produced and the Revenue's allegations of treaty abuse lacked substantive evidence.

Deemed Dividend Under Section 2(22)(e)

A recurring issue is whether loans or advances by closely-held companies, treated as deemed dividends under Section 2(22)(e), qualify for the reduced treaty rate. The general view, supported by various ITAT decisions, is that deemed dividends fall within the treaty definition of dividends and are eligible for the treaty rate.

Dividend Distribution Tax vs Withholding Tax

Prior to the abolition of the Dividend Distribution Tax (DDT) in India with effect from 1 April 2020, there was uncertainty about whether DDT paid by the Indian company could be offset under the treaty. Post-abolition, dividends are now taxed in the hands of the recipient, making the treaty withholding rate directly applicable.

Practical Examples and Calculations

Example 1: Portfolio Investor

An Australian individual holds shares in an Indian listed company and receives a dividend of INR 10,00,000. Under domestic law, the Indian company would withhold TDS at 20% plus surcharge and cess (approximately 20.8%), resulting in a tax of INR 2,08,000. Under the India-Australia DTAA, the withholding is limited to 15%, i.e., INR 1,50,000 -- a saving of INR 58,000.

Example 2: Corporate Shareholder

An Australian corporation holds 25% of shares in an Indian subsidiary. A dividend of INR 1,00,00,000 is declared. Under the treaty, the withholding is capped at 15%, i.e., INR 15,00,000. Under domestic law, the rate would have been 20% plus surcharge (approximately 21.84% for companies), resulting in INR 21,84,000. The treaty saves INR 6,84,000.

Example 3: Mutual Fund Distribution

An Australian resident receives INR 5,00,000 from an Indian mutual fund. Since mutual fund distributions are treated as dividends post the Finance Act 2020 amendments, the treaty rate of 15% applies, resulting in a tax of INR 75,000 compared to INR 1,04,000 under domestic rates.

Frequently Asked Questions

What is the dividend withholding tax rate under the India-Australia DTAA?

The maximum withholding tax rate on dividends under Article 10 of the India-Australia DTAA is 15% of the gross dividend amount. This applies uniformly to all beneficial owners who are residents of Australia, regardless of their shareholding percentage in the Indian company.

Is the 15% rate automatic or does the Australian shareholder need to claim it?

The reduced 15% rate is not automatic. The Australian shareholder must furnish a valid Tax Residency Certificate from the Australian Taxation Office, Form 10F (if TRC details are incomplete), and a beneficial ownership self-declaration to the Indian payer before the dividend payment date.

Does India differentiate between portfolio and substantial holding dividends for Australia?

No. Unlike the India-USA or India-Canada DTAAs, the India-Australia DTAA applies a flat 15% rate to all dividend payments regardless of the percentage of shareholding held by the Australian beneficial owner.

Can an Australian shareholder get a refund if TDS was deducted at the higher domestic rate?

Yes. If the Indian payer deducted TDS at the domestic rate of 20% plus surcharge and cess instead of the treaty rate of 15%, the Australian shareholder can file an Indian income tax return to claim a refund of the excess tax deducted.

How does the MLI affect dividend taxation under the India-Australia DTAA?

The MLI introduces a Principal Purpose Test (PPT) to the India-Australia treaty. Under the PPT, treaty benefits (including the reduced 15% dividend rate) can be denied if one of the principal purposes of an arrangement was to obtain the treaty benefit, unless granting the benefit is consistent with the object and purpose of the treaty provision.

Are deemed dividends under Section 2(22)(e) eligible for the 15% treaty rate?

Generally yes. The treaty definition of dividends is broad and covers income from shares and other income subjected to the same taxation treatment. Deemed dividends under Section 2(22)(e) of the Indian Income Tax Act are considered dividends for treaty purposes and can benefit from the reduced 15% rate, subject to beneficial ownership conditions.

What happens if the Australian shareholder does not have an Indian PAN?

Under Section 206AA, TDS may be deducted at 20% if the recipient does not furnish a PAN. However, per CBDT Notification No. 53/2016, treaty rates prevail over Section 206AA rates for non-residents who furnish the prescribed documents (TRC, Form 10F, and self-declaration), even without a PAN.