View | Akshata Murthy UK tax fracas: The elephant in the room is India's weak DTAAs

Akshata Murthy, daughter of Infosys founder Narayana Murthy and wife of Chancellor of Exchequer the UK Rishi Sunak has been in the eye of the storm. The charge is she has ample overseas income including dividends from her 0.93 percent shareholding in Infosys and not paying tax on them, pretending to be a non-resident. It now turns out that she has volunteered to pay taxes to the UK exchequer on her foreign income though strictly speaking she might not be required to. Her husband is feeling the relentless heat of ruckus over not disclosing the family’s assets as he is obliged to more so as he is Caesar’s wife holding as he does the august office of chancellor exchequer. The belated magnanimity to pay up tax though not required in her considered view may thus be a grandstanding. Be that as it may.

India, which has fashioned most of its laws after its former ruler and the UK reach out to a resident’s world or global income for taxation. The opposition in the UK says her declaration of non-domicile status in the UK is an afterthought to buck the heavy UK income tax on her ample foreign income including from her Infosys holdings.

Section 9 of the Indian Income Tax Act says dividend payable by an Indian company is deemed to arise in India, period. The implication is no matter where you live or get paid such dividends, it is taxable in India. A peremptory law indeed. But then the entire tenor of section 9 is this—if you earn your income abroad which is not possible but for its Indian connection, you are taxable in India. That is how capital gains from the transfer of shares of Indian companies are taxable in India no matter where the deal is consummated, Cayman Island or Ajanta Caves!

But the rigor of the Indian income tax law has to yield to the Double Taxation Avoidance Agreement (DTAA) with the country of which a non-resident is a subject. The Indo-UK DTAA says dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. Reduced to simple terms, a UK resident does not have to pay tax to the Indian government on dividends from Indian companies but instead he has to pay tax thereon to the UK exchequer.

So, what is the fuss all about made by section 9 given the fact that the powerful nations of the world wangle favorable terms for themselves from all contracts including DTAA. The bottom line is if a big UK investor get dividend from India, he is not liable to tax in India on such dividend. Why do we genuflect before the western nations is a million-dollar question? Be that as it may.

Coming back to Ms. Murthy, it must be noted that, by her own admission, she is not domiciled in the UK where she has been living only since 2015 thus making her a non-resident. The India-UK DTAA applies to her only if she is a resident of the UK. If she is not, section 9 is squarely attracted—she has to pay tax on her dividend income from Infosys to the Indian government and Infosys will have to deduct tax at source under section 195.

It is axiomatic that DTAA doesn’t mean one can thumb his/her nose at both countries. Akshata might have magnanimously offered to pay up taxes to the UK government on her dividend from Infosys among others despite her non-resident status but the issue is under whose jurisdiction her income by way of dividend from Infosys falls. Looks like it falls under the Indian jurisdiction. It is not for her to choose where she would like to pay her taxes. The law will decide.

And the law clearly is on the Indian government’s side. She is not a resident of the UK; ergo the Indo-UK DTAA doesn’t hold sway. If this is true, Infosys ought to have deducted tax at source from her dividend assuming it hasn’t. She might have sued for peace with the UK opposition and strident media but the Indian government should follow the letter of the law and the DTAA and not the compulsions of realpolitik in the UK.

The larger issue however is why our DTAAs defer to the economic might of the interlocutors. What the Indo-UK DTAA implies is if Unilever has huge stakes in its Indian subsidiary, the dividend earned by the former from the latter would not be taxable in India but only in the UK. So much for the source rule of taxation India swears by!