The government is contemplating tweaking tax laws to allow foreign companies claim deduction in home countries for the dividend tax paid by the subsidiaries in India.
Some announcement in this regard is likely to be made by Finance Minister Arun Jaitley in his Budget on February 28, sources said.
"This will address the anomaly with regard to the dividend distribution tax paid by subsidiaries of foreign companies," the source said.
Dividend Distribution Tax (DDT) is levied at the rate of 20 per cent on dividend paid by companies to its shareholders.
Before the introduction of this levy in 1997, the shareholders were subjected to tax on dividend receipt.
Currently, foreign companies face a challenge in claiming credit in their home country for DDT paid by their Indian subsidiary.
"Necessary changes should be made to restore the earlier tax position of taxing the dividends in the hands of the shareholders i.e. the recipient or else a deeming provision should be brought in to clarify that DDT is the tax of the foreign company being collected from the Indian subsidiary," said Vikas Vasal Partner Tax KPMG (India).
Companies are required to pay DDT to the government within 14 days of either declaration or distribution or payment of dividend, whichever is earlier.
Although DDT is levied at 15 per cent, education cess and surcharge adds up the gross levy to about 20 per cent.