Union Budget 2018- Application of Dividend Distribution Tax to Deemed Dividend
At present dividend distributed by a domestic company is subject to dividend distribution tax payable by such company. However, deemed dividend under sub-clause (e) of clause (22) of section of 2 the Act is taxed in the hands of the recipient at the applicable marginal rate. The taxability of deemed dividend in the hands of recipient has posed serious problem of the collection of the tax liability and has also been the subject matter of extensive litigation.
With a view to bringing clarity and certainty in the taxation of deemed dividends, it is proposed to delete the Explanation to Chapter XII-D occurring after section 115Q of the Act so as to bring deemed dividends also under the scope of dividend distribution tax under section 115-O. Further, such deemed dividend is proposed to be taxed at the rate of 30 per cent. (without grossing up) in order to prevent camouflaging dividend in various ways such as loans and advances.
This amendment relating to imposition of dividend distribution tax on deemed dividend will apply to transactions referred to in sub-clause (e) of clause (22) of section 2 of the Act undertaken on or after 1st April, 2018.
Extract of Clause 38 & 39 of Finance Bill 2018
Clause 38 of the Bill seeks to amend section 115-O of the Income-tax Act relating to tax on distributed profits of domestic companies.
It is proposed to insert a proviso to sub-section (1) of the said section so as to provide for levy of tax at the rate of thirty per cent. on distributed profits in the nature of dividend under sub-clause (e) of clause (22) of section 2.
It is further proposed to insert a proviso to sub-section (1B) of the said section 115-O so as to exclude the amount of dividend under sub-clause (e) of clause (22) of section 2 from the applicability of grossing up provisions of the said sub-section.
These amendments will take effect from 1st April, 2018.
Clause 39 of the Bill seeks to omit the Explanation occurring after section 115Q of the Income-tax Act.
The said Explanation clarifies that the expression “dividends” shall have the same meaning as is given in clause (22) of section 2 but shall not include sub-clause (e) thereof.
It is proposed to omit the said Explanation consequent to the amendments made to section 115-O.
This amendment will take effect from 1st April, 2018.