CA. M. Lakshmanan

In the budget it is proposed to tax dividends @ 10% in the hands of shareholders if the same exceeds Rs. 10 Lakhs. Already the companies are paying income tax @ 30% with Eduction Cess @ 2% Secondary & Higher Education Cess @ 1% on the tax and in addition Surcharge is payable is @ 7% if the Taxable Income exceeds Rs 1 Crore and @ 12% if the Taxable Income exceeds Rs. 10 Crores.

At the time of distribution of Dividends again tax is paid @ 15% plus Surcharge of 12% on tax with usual Education Cess @ 2% and Secondary & Higher Education Cess @ 1% on the tax wherein the tax is inclusive of the dividend paid.

Hence for example a company which has got taxable income of Rs. 12 Crores will have to pay Income Tax of Rs. 5,31,05,094/- and the share holder has to pay Rs. 66,89,491/- as per the calculations enclosed in the excel sheet. The resultant rate of tax is 49.83 which is more than the rate of tax of 45% proposed for the new amnesty scheme for Black Money proposed in the Budget.

From the example one can see that the income was taxed at three levels viz. one at the hands of the company at the time earning and again in the hands of the company at the time of distribution as Dividend Distribution Tax and for the third time in the hands of the share holder @ 10% if the same exceeds Rs. 10 Lakhs.

Instead if the Government is bent upon retaining the DDT (i.e. taxing the same income two times) instead of exempting the dividend income totally up to Rs. 10 Lakhs and taxing the same @ 10% if the same exceeds Rs. 10 Lakhs, the DDT can be treated as TDS and it should be allowed as deduction from the tax payable and further, exemption can be granted up to a limit of Rs.25,000/- (to encourage small investors). This will be in line with one of the canons of taxation advocated by the great scholar Adam Smith viz. ‘

Example

Income Tax on Companies
Income -A     1200,00,000
Income Tax @30%       360,00,000
EC @2%             7,20,000
SHC 1%             3,60,000
       370,80,000
SC 12%         44,49,600
Total Income Tax paid – B       415,29,600
Income after tax ( A – B) – Dividend payable       784,70,400
Less: *DDT @ 17.304% – C       115,75,494
Dividend Paid       668,94,906
Tax on dividend paid by the share holder @10% – D         66,89,491
TOTAL Tax B + C +D       597,94,585
% of Income Tax paid                 49.83
Amount available for Dividend -X117.304
Dividend Paid100
* Tax @15%15
Surcharge @12 on Tax1.8
16.8
EC @ 2%0.34
SHC @ 1%0.168
Tax paid – Y17.304

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