Removal of DDT (Dividend Distribution Tax) by Finance Act, 2020 (FA 2020) and its impact on other provisions of Income Tax Act, 1961

Existing Provisions (before amendment):

Section 115-O provides that, in addition to the income-tax chargeable in respect of the total income of a domestic company, any amount declared, distributed or paid by way of dividends shall be chargeable to additional income tax at the rate of 15 percent. The tax paid on such dividend is treated as the final tax (called as DDT). However, the dividend tax @30% is leviable on deemed dividend under section 2(22)(e).

Now, section 10(34) provides that any income by way of dividends, referred to under section 115-O, is excluded from the total income of the shareholder.

It may be noted that the exemption available under section 10(34) would not be allowable in respect of dividend income chargeable to tax in accordance with the provisions of section 115BBDA, even if the dividend distribution tax is paid by the domestic company on such amount of dividend.

Section 115BBDA provides for Tax on certain dividends received from domestic companies (dividend taxable in the hands of the shareholder):

  • Any income received by way of aggregate dividend in excess of 10 Lakh shall be chargeable to tax in case of the specified assessee (Person resident in India other than a domestic company, fund or institution or trust referred u/s 10(23C) or 12AA) at the rate of 10%.
  • Further, no deduction shall be allowed in computing income by way of dividends.

Similarly specified company or mutual fund is required to pay additional income tax on income distributed to its unitholders at the prescribed rates and the income from units received by a unitholder is exempt from income tax u/s 10(35).

Amended Provisions:

It is amended so that dividend or income from units are taxable in the hands of shareholders or unitholders at the applicable rate and the domestic company or specified company or mutual funds are not required to pay any DDT. It is also provided that the deduction for expense under section 57 of the Act shall be maximum 20 per cent of the dividend or income from units. Further, certain amendments have also been made in various sections to remove the cascading effect, removal of exemption u/s 10(34)/10(35) of dividend /income received in the hands of shareholder/unitholder and inserted new provisions to provide for tax deduction on dividend income/distributed income.

Memorandum explaining amendment:

The incidence of tax is, thus, on the payer company/Mutual Fund and not on the recipient, where it should normally be. The dividend is income in the hands of the shareholders and not in the hands of the company. The incidence of the tax should therefore, be on the recipient. Moreover, the present provisions levy tax at a flat rate on the distributed profits, across the board irrespective of the marginal rate at which the recipient is otherwise taxed. The provisions are hence, considered, iniquitous and regressive. 

The aforesaid amendment brings in to various other amendments in the Act also. The Major implications to the different provisions are mentioned below:

Amendment Impact on Mutual funds:

Income from units of a mutual fund, currently exempt subject to distribution tax, is to be taxed in the hands of the unit holder. It is also provided that the payer shall deduct TDS at the rate of 10% on such income if it exceeds ₹ 5,000 and the unit holder is a resident in India. In the case of a non-resident unit holder, the payer shall deduct tax at the rate of 20%.

Amendment Impact on Business Trust:

Existing Provision: Dividends earned from business trusts were exempt from income tax in the hands of the recipients.

Amended Provisions: levy tax on such dividends in the hands of the unitholder.

Amendment Impact on Taxability of dividend from a special purpose vehicle (SPV) in the hands of a unitholder of a business trust:

Income earned from a business trust in the nature of dividend from an SPV, which were earlier exempt from tax, is now required to be offered to tax by the unitholder. The limitation has been imposed on interest expenditure allowance to the extent of 20% of the income from mutual fund u/s 57.

Removal of Exemption in hands of Shareholder and Unitholder: Exemption u/s 10(34) in respect of dividend income and u/s 10(35) income in respect of units has been removed.

Certain Amendments have been brought to the provisions of TDS also to give the effect of the same:

 Section 194K- TDS on income in respect of units of Mutual Fund @ 10% with a threshold limit of Rs. 5000/-.

194LBA Certain income from units of business Trust

Now, a business trust, while distributing dividend to its unit-holders shall also deduct TDS at following rates:

Payment to resident unitholders  @10%

Payment to non-resident unitholders  @5%

Section 196A- Income in respect of units of Non –Resident: Applicability of TDS is revived on income in respect of units of a mutual fund on payment made to non-residents @ 20%

Section 196C- Income from foreign currency bonds or shares of Indian Company: Now, it is provided to deduct TDS @ 10% on dividend paid to a Non- resident in respect of global depository receipts.

Section 196D- Income of Foreign Institutional investor from Securities: Now, it is provided to deduct TDS @ 20% on dividend paid to Foreign Institutional Investor.

Section 194- Dividend: TDS will be deducted at the rate of 10% on dividend paid to any person with a threshold of Rs. 5,000.

Disclaimer: These updates are compiled for the general information of readers from the various sources including official documents of Finance Act, 2020. Readers are advised to seek professional opinion before initiating any action based on this document. The author can be reached @ piyush_agrawal@icai.org or agrawalpiyush91@gmail.com.

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