I am a Non-Resident Indian (NRI) and I have my own business in Dubai. I have invested in stocks and mutual funds in India. I have received dividends on stocks and mutual funds. Can I get any lower tax benefit under the treaty on the dividend income?
—Name withheld on request
Under the India-United Arab Emirates Double Taxation Convention (DTAA), dividend income is addressed under Section 10. While Section 10 makes reference to national tax laws, it provides a stand-alone definition of “dividend”, which is not based on the definition given in the Income Tax Act, 1961 (ITA).
Under this treaty definition, stock dividend income is clearly covered and you are entitled to a lower tax rate of 10% instead of the usual 20% (plus applicable surcharge and levy) under the ITA.
However, it is necessary to further examine whether dividend income from mutual funds is similarly covered by Section 10.
In addition to including income from stock dividends, the definition of “dividend” under Section 10 also covers income from “corporate rights,” which is taxed in the same manner as stock dividends.
Although dividends from mutual funds are taxable under the ITA in the same manner as dividends from shares, they do not arise out of “corporate rights” nor are mutual funds taxable in India in a manner comparable to companies.
Furthermore, according to the Securities and Exchange Board of India (Sebi) mutual fund regulations, a mutual fund is established in the form of a trust.
As a trust, a “mutual fund” does not meet the definition of an “enterprise” under the treaty, as it is considered neither a company nor a legal entity for tax purposes under the ITA.
Therefore, mutual fund dividends do not qualify as “dividends” under Section 10 and are not eligible for the reduced 10% tax rate under the DTAA.
Since dividends from mutual funds are not covered by Article 10, they fall within the scope of Article 22, which deals with residual income.
As per Article 22 of the DTAA between India and UAE, taxation rights on any residual income are allocated to UAE. Therefore, dividends from mutual funds are not taxable in India as per the treaty.
That said, there is judicial precedent on both sides, and you should seek professional advice to examine treaty eligibility for mutual fund dividend income in your specific case.
—Harshal Bhuta is a partner at the public accounting firm PR Bhuta & Co.
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