New Dividend Distribution Tax Regime in India, a 3 Part Analysis || Part 1: Indian Tax Payer
Indian Finance Act 2020 has abolished Dividend Distribution Tax and, with effect from April 1, 2020, dividends declared by Indian companies would be taxable in the hands of shareholders. Replacing the concept of distribution taxes in the hands of the Indian company that was introduced in India in 1997.
This change though small but has large ripple effects and has been done with the ultimate objective to attract investments into India. We talk about the same in details in our next two articles. Further, we will also discuss below how this would effect the three categories of taxpayer: Resident Shareholder, Non-Resident Shareholder and the Company
The resident shareholders:
(i) As per the provisions of the Act, the Companies and mutual funds will have to deduct or withhold tax (TDS) at 10 percent (Reduced to 7.5% for period from 14 May 2020 until 31 March 2021) on dividend income paid in excess of Rs 5,000.
(ii) This will effect the section of taxpayers who were not filling income tax return as there income did not cross the Threshold Limit. Now they will have to mandatorily file return of income in order to claim refund of Income Tax Paid.
(iii) The mutual funds will loose the advantage of full reinvestment of the dividend income over traditional form of saving instrument i.e. Fixed Deposits thereby effecting the yeilds.
Small Tax Payer
Medium Tax Payer, Companies and LLP
(i) Medium Tax Payers, Indian firms and LLPs will be liable to pay tax on the entire dividend income resulting in higher tax outflow under the new dividend taxation regime.
(a) Under the earlier regime, the effective rate of tax was as follows
(b) If Dividend income does not exceed 10 Lacs: DDT at 20.56%
(ii) If Dividend income does not exceeds 10 Lacs: Additional Tax at 11.60% under section 115BBDA (Tax at 10% plus surcharge at 12% and education cess at 4%)
(iii) In the new Regime: Tax shall be levied at 34.90% (tax rate of 30% plus surcharge at 12% and education cess at 4%). (Assuming a uniform tax rate of 30%, this would change for companies with turnover less than 400 crore having the basic tax rate of 25%)
(iv) Therefore, a marginal increase of 2.7% in the rate of tax for all other cases
High Net Worth Tax Payers and Companies
The dividends which were earlier taxed at
(i) For Assessee with dividend income less than 10 Lacs: 20.56%
(ii) For Assessee covered under 115BBDA i.e. dividend income in excess of 10 lacs: 34.8% (6% plus income tax at 14.2% ie. tax at 10% plus surcharge at 37% and education cess at 4%)
(iii) Going forward the dividend will be taxed at: 42.74% in the case of resident individuals, Trusts, etc., falling under the highest slab and with income above Rs. 5 crore who are subject to the maximum rate of 30% (plus surcharge at 37% and cess at 4%) /34.94% in the case of resident companies.
Some common points of consideration for all taxpayers:
The Finance Act, 2020 also provides for deduction of interest expense incurred for earning dividend income upto 20% of the dividend income received.
No other deduction for any other expenditure incurred for earning the dividend income shall be allowed
Dividend received from a foreign company gets taxed both in India and in the home country of the foreign company. However, if the tax on an international company’s dividend has been paid twice (i.e. paid in both the nations), then the taxpayer can claim double taxation relief.
The relief claimed can be either as per the provisions of double taxation avoidance agreement entered into by the Government of India, with the country to which the foreign company belongs, or he can claim relief as per Section 91 (in case no such agreement exists). This means that the taxpayer doesn’t have to pay tax on the same income twice.
The following set of Assessee can claim exemption from withholding of tax (TDS):
(i) Insurance companies: By providing a declaration that they are beneficial owners of shares held;
(ii) Mutual Funds: By providing a declaration that they are governed by the provisions of section 10(23D) of the Act along with copy of registration documents (self-attested by the competent authority);
(iii) Alternative Investment Fund (AIF) established in India: By providing a declaration that its income is exempted under section 10(23FBA) of the Act and they are established as Category I or Category II AIF under the SEBI regulations. Copy of registration documents (self-attested) should be provided.
(iv) New Pension System Trust: By providing a declaration that they are governed by the provisions of section 10(44) [subsection 1E to section 197A] of the Act along with copy of registration documents (self-attested);
(v) Corporation established by or under a Central Act which is, under any law for the time being in force, exempt from income- tax on its income – Documentary evidence that the person is covered under section 196 of the Act.