The shift in the dividend distribution tax (DDT) in the hands of shareholders hailed a big relief for corporates and non-resident. This article primarily focuses on, how (DDT) is taxed as per new amendments by the Finance Act, 2020. It also aims to show, the impact of (DDT) in the hands of shareholders i.e. whether is it beneficial to them, if yes , then to what extent.
Dividends are the part of the profits that the company shares with the shareholders. When the companies give the dividends to the shareholders, a tax is levied on it, which is called as dividend distribution tax (DDT ). Thus, DDT is taxable at source i.e. the companies at the time of declaring or distributing the dividends, deduct the tax on gross amount of the dividend that it wish to give to the shareholders. This makes the dividend income tax free in the hands of the shareholder.
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Issues with Dividend Distribution Tax
Primarily if we observe the mechanism of DDT, we can easily find the cascading effects. These effects apparently depicts that there is double taxation of income for both, the company declaring the dividend and the shareholder receiving the dividend. As per the mandate of section 115-O,
the company declaring the dividend has to give the tax on such dividends @20.55%, which is over and above the corporate tax. Similarly the shareholder has to comply with the provisions of section 115BBDA, as per which if the aggregate dividend income exceeds the Rs 10 lakh, tax @ 10% is to be paid. This shows the exploitation of the taxpayer.
Further it was argued that DDT were discouraging the foreign investment as, the non-resident could not avail the tax credit. Similarly it was argued that, the residents whose income is very low and their applicable tax slabs are low, they are not benefitted at all because the DDT was 20%. As per their demands the same could be more beneficial if it was taxed in the hands of shareholder itself.
Provision for Tax Implications On Residents Before Finance Budget 2020
Section 115-O of the Income tax Act, 1961 (IT ACT, 1961) provides that, in addition to the income tax chargeable in respect of the total income of a domestic company, any amount that is declared or distributed or paid by way of dividends shall be charged to additional income tax @15% (plus 12% surcharge + 4% cess , that makes the effective rates as 20.555% ).
As per section 10(34) this dividend income is exempted in the hands of shareholder i.e. now the shareholder is not liable to pay any tax on such income. But when such dividend income (aggregate) exceeds the amount of Rs. 10 lakh, it becomes taxable in the hands of the shareholder by virtue of section 115BBDA @10%.
Table A
| Situation
1. dividend of Rs 1000is distributed by the company in year 2019 Rs.10 per share on its 100 share 2. Dividend of Rs1,00,00,000distributed by company (Rs 1000 per share on its 10,000 shares) |
Tax Implication on the company (DDT@ 20.55%)
Rs. 205.5 to be paid as tax Rs 20,55,500 to be paid by the company as tax |
Shareholding and dividend received by Shareholder
|
Tax Implication on the Shareholder This will be Nill by virtue of section 10 (34)
Rs. 20,800 By virtue of Sec-115BBDA ( @10% + 4% cess) Amount up to Rs. 10,00,000 is exempted u/s 10(34) |
Provisions for Tax Implication On Residents After Finance Budget 2020
Due to the abolishment of DDT and reinstate of dividend tax in the hands of shareholder the Finance Act 2020 proposed the following:
i) It abolished the effect section 115-0, section 10(34) and
ii) New provisions were enacted like section 194, which provides that the company declaring or distributing the dividend is required to deduct TDS @10% if the dividend amount exceeds Rs. 5000.
iii) Section 195 which provides that when dividend is declared or distributed by the companies to non-residents then, it is required to deduct tax on such dividend amount.
iv) Section 57 was subjected to some changes, wherein if the investor has incurred some expenses over the income of such dividends then, the investor can claim maximum 20% of expenses as deductions.
| Situation
1. dividend of Rs 1000 is distributed by the company in year 2020 Rs.10 per share on its 100 share 2. Dividend of Rs1,00,00,000distributed by company (Rs 1000 per share on its 10,000 shares) |
Tax Implication on the company ( No DDT)
DDT is now abolished therefore no tax is to be paid by the company No TDS is to be paid as dividends are below the amount of 5000 Rs 1,20,000 (TDS) TDS @ 10% is to be deducted by virtue of sec-194 |
Shareholding and dividend received by Shareholder
|
Tax Implication on the Shareholder
This amount is to be included in the total income of the share holder. Thus, chargeable to tax as per the tax slab applicable. The shareholder will adjust the TDS amount at the time of filing ITR |
Table B
Provision for Tax Implication on Non-Residents Before & After Finance Act 2020
Prior to the abolition of DDT, any foreign investor who receives any dividends, the same was taxable in the hands of the companies @20.55% which was the mandate of section 115-O of ITA, 1961. Because the tax was deducted in the hands of the companies, no tax credit was available to non-residents. Thus after paying DDT on dividends they also had to pay in their home country.
Post Finance Act 2020, the companies distributing the dividends are required to deduct TDS @20% as per the mandate of section 115A. The benefit of TDS is now available as a tax credit which was the intention of this proposed change i.e. encouraging the foreign investment. Besides this the benefits of DTAAs can also be availed by non-residents.
Gainers vs. Losers After Abolition of DDT:
| Gainers | Losers |
| Retail Investors whose income tax slab rates are below 20%. | Promoters
They are the worst affected as firstly, they have to pay corporate tax. Secondly these promoters own high percentage shares in the companies, so the amounts of dividends would be huge, which will attract heavy tax . |
| Non residents | Individuals falling under high tax slabs |
| Due to applicability of TDS @ 20%, the non-residents can now take the credit benefit in their own country. Also they can avail the treaty benefits . | Earlier the dividend amount was taxed by the companies on a flat rate of 20% which was tax free in the hands of shareholder up to Rs. 10 lakh. But now this dividend amount will form the part of total income which will be taxed as per the slab rates applicable to it. |
Conclusions-
In September 2019, the central government with an intention to boast the investment cycle in the economy reduced the corporate tax rates and subsequently in the Finance Act 2020, the government abolished DDT. These are the welcoming steps with the aim to encourage foreign investment and to leave more profits in the hands of the companies to further reinvest. There are pros and cons to everything, similarly DDT abolition has a huge negative impact on promoters of the company. The high tax implications on promoters is an intended step of the government in preventing companies from sharing profits to its shareholders so that such profits can further be reinvested. Therefore taxability of dividends in the hands of the shareholder has both positive and negative implications on residents with high income tax slab rates whereas it has positive implications on foreign investors and on residents with low income slab rates.
References
https://www.financialexpress.com/money/income-tax/dividend-distribution-tax-will-abolished-ddt-benefit-you-if-your-income-is-high/1945349/
https://taxguru.in/income-tax/abolition-ddt-impact.html
https://incometaxindia.gov.in/tutorials/tax%20treatment%20of%20dividend%20received.pdf
https://www.mondaq.com/india/withholding-tax/934760/taxability-of-dividend-pre-post-budget-analysis
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