prpri Dividend Distribution Tax Abolishment (Advantageous to MNCs) Dividend Distribution Tax Abolishment (Advantageous to MNCs)

Abolishment of Dividend Distribution Tax [Advantageous To Multinational Companies (MNCs)]

This article is focused on one of the key amendments proposed in union budget 2020 i.e. abolishment of Dividend Distribution Tax. We have analysed here the impact of DDT abolishment on resident as well as overseas shareholders with the help of facts & findings.

Presently the company is required to pay dividend Distribution Tax under section 115-O @15% (effective rate of tax is 20.56%). Further under section 115BBDA, if an individual/HUF receive dividend exceeds Rs. 10 Lacs, required to pay further tax on dividend income exceeding Rs. 10 Lacs at the rate of 10%. Now, as per the finance act 2020 dividend distribution tax under both the Section 115-O & 115BBDA abolished. Now the dividend received by any shareholder is considered as ordinary income and taxable at rate applicable to such person.

Dividend Distribution Tax

Adverse Impact on Resident in India of Dividend Distribution Tax Abolishment

The taxation of dividend in the hands of shareholders will have adverse impact except for those who are taxed at rate which is lower than 20%. The observation analysed below:

Particulars Old Regime New Regime
Distributable profit 120.56 120.56
DDT Paid by Company 20.56  –  –  –  –
Dividend to be received by Shareholder 100.00 120.56
Tax Rate 20.80% 31.20% 34.32% 42.74%
20%+4% Cess 30%+4% Cess 30%+10% Sur.+4% cess 30%+37%+ Sur.+4% cess
Tax on dividend Payable by Shareholder 25.08 37.61 41.38 51.53
Net Income in the hands of shareholder 100.00 95.48 82.95 79.18 69.03
Net Increase in Tax Liability 4.52 17.05 20.82
Tax under 115BBDA @ 10% + surcharge 37% + Cess 4% (Considering dividend income exceeding 10Lacs) 14.25
Net Income in the hands of shareholder 85.75 69.03
Net Increase in Tax Liability 4.52 17.05 20.82 16.72

Similarly, in case of companies which opt for the reduced tax rate of 25.17% (22%+10% surcharge +4% cess) under section 115BAA the net liability will increase and Net Income in the hands of shareholders will decrease as can be seen from below table:

Particulars Old Regime New Regime
Total Income 100.00 100.00
Total Tax 25.17 25.17
Amount available for distribution to shareholder 74.83 74.83
DDT @ 20.56% on net dividend distributed 12.76
Dividend Distribute to shareholder 62.07 74.83
Tax under 115BBDA @ 10% + surcharge 37%+Cess 4% (Considering dividend income exceeding 10Lacs) 8.84
Tax @ 42.744% (30% +37% sur.+4% cess) 31.99
Net Income in the hands of Shareholders 53.23 42.84
Effective tax rate 46.77% 57.16%

Thus, from the above working it is clear that Net Tax Liability even in case of reduced tax rate of 22% increase from 47.66% to 57.16%, similarly if company opt to pay tax @ 30% the effective tax rate increases.

CSR Impact: – It is important to note that company is required to pay CSR @ 2% of its profit in case of profit is more than 5 crore or more U/s 135 of companies Act, and no deduction of CSR expenditure is allowed while computing business income. This 2% of CSR obligation is an additional tax and net income in the hands of shareholder further reduced to that extent.

Benefits to Multinational companies/Non-resident from Dividend Distribution Tax Abolishment-

At present the dividend is distributed by the companies to its shareholder after paying dividend distribution tax. The DDT so paid is not eligible as credit in their respective countries while paying tax. Now as per Finance bill, 2020 DDT is abolished however companies while paying dividend to non resident shareholders is required to deduct TDS @ 20% under section 115A of the income Tax act. The TDS so deducted is eligible as credit to overseas shareholders against the tax liability on such dividend income in its home country. More importantly a non-resident can also opt to be govern by the provision of tax treaty, if they are more beneficial to them to pay tax at lower rate on dividend.

The Impact of changes on foreign companies whose dividend income is taxable in their home country @ 20% (just for comparison) summarised below:

Particulars Old Regime New Regime
Tax on Indian Company (DDT) 20%  –
Tax on Foreign Investor in India  – 10%-15%
Tax Credit Available to Non-resident in Home Country Available to the extent tax payable in-Home Country
Tax in Home Country 20% 5% (15% credit of TDS is available
Total tax 40% 15%-20%

Conclusion: – The taxpayers would be liable to pay tax at the rate of tax applicable to them. As a result, only the shareholders who are under lower tax bracket (lower than 20% bracket) will be benefited. Additionally, TDS withheld by the company from dividend shall impose additional burden on small shareholders, which will be adjusted against tax liability at the time of filling of refund or claiming a refund. On the other hand, multinational companies or overseas shareholders will get the benefit of TDS deducted in their home country and consequently their tax cost will reduce.

Disclaimer: – “The above article is prepared by author with full caution and understanding of relevant section & notification for study & understanding of students. Please consult before taking any decision on the subject issue”. 

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August 2021