A. Existing Provisions relating to dividend taxation:
(i) Tax implication in the hands of company: Under the existing laws, even though dividend constituted income in the hands of the shareholders, the tax on such dividend was payable by the company which declared dividend, @ 15% of the gross dividend under section 115-O (plus surcharge and cess) which amounted to effective Dividend Distribution Tax (DDT) of 20.36% (except dividend covered under section 2(22)(e) , where rate of DDT was 30%). However, no deduction or credit is allowable to the company, in respect of such DDT.
(ii) Tax implication in the hands of the shareholder: Under the existing regime, the dividend which was received by the shareholder and covered under section 115O, was exempt in their hands under section 10(34). However, where a specified shareholder (other than Indian Company / Trust covered under section 12A or 12AA, amongst others), received dividend exceeding Rs. 10 lakhs, such recipient was liable to pay tax @ 10% (plus applicable surcharge and cess), in addition to the DDT paid by the company which leads to double taxation. Even in the case of non-resident shareholders, dividend received from Indian company is not liable to tax in India. Accordingly, the Indian Company declaring dividend was not liable to deduct TDS from such dividend. However, in cases, where such dividend was liable to tax in the hands of non-resident in their country of residence, there was generally no credit available for the dividend distribution tax paid by the Indian Company.
In order to remove the adverse impact of the existing regime, the Hon’ble finance minister has re-introduced the classical system of dividend taxation and this classical system of taxing dividends will be effective from Financial Year 2020-21 and will apply to dividends distributed on or after 01.04.2020. Correspondingly, the following provisions were inoperative till 31.03.2020.
a) Section 115-O , tax on distributed profits of domestic companies
b) Section 115-R, tax on distributed income to unit holder
c) Section 115BBDA, tax on certain dividends received from domestic companies
d) Section 10(34), dividend income from domestic company
e) Section 10(35), Income from specified mutual fund
Obligation of the domestic companies: The domestic companies shall not be liable to pay DDT on dividend distributed to shareholders on or after 01-04-2020. However, domestic companies shall be liable to deduct tax under Section 194.As per the Section 194, which shall be applicable to dividend distributed, declared or paid on or after 01-04-2020, an Indian company shall deduct tax at the rate of 10% from dividend distributed to the resident shareholders if the aggregate amount of dividend distributed or paid during the financial year to a shareholder exceeds Rs. 5,000.
However, if the resident shareholder fails to submit his Permanent Account Number, the company is required to deduct tax at a higher rate of 20%. Further, the resident shareholder can also approach the tax authorities for obtaining a lower withholding tax certificate if he believes that the appropriate withholding tax should be lower than 10%.
However, no tax shall be required to be deducted from the dividend paid or payable to Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC) or any other insurer in respect of any shares owned by it or in which it has full beneficial interest. However, where the dividend is payable to a non-resident or a foreign company, the tax shall be deducted under Section 195 in accordance with relevant DTAA.
C. Tax implications in the hands of resident shareholders:
|(Incl. Surcharge and cess)|
|i) Tax rate with incentives / exemptions 34.94% *|
|(Applicable for companies which have
Not opted for concessional tax regime)
|ii) Tax rate without incentives / exemptions 25.17%**|
|(Applicable for companies which have
opted for concessional tax regime under section 115BAA)
|iii)Tax rate without incentives / exemptions 29.12%***|
|(Applicable for companies which have opted for concessional tax regime under old section 115BA)|
* provided total income exceeds Rs. 10 Crore. If Income exceeds Rs. 1 Crore but less than Rs. 10 Crore then effective tax rate is 33.38%. If income is less than Rs. 1 Crore then effective tax rate is 31.2%.
** Surcharge is at flat rate of 10% irrespective of income excess is more than or less than Rs. 10 Crore.
*** provided total income exceeds Rs. 10 Crore. If Income exceeds Rs. 1 Crore but less than Rs. 10 Crore then effective tax rate is 27.82%. If income is less than Rs. 1 Cr then effective tax rate is 26%.
A non-resident person invests in India either directly as a private equity investor or as FPIs. If non-resident is holding shares as an investment, the income derived there from is taxable as an Income from other source. If such income is attributable to permanent establishment of non- resident in India, it will be treated as business income. In case of FPIs, the investment held will always be treated as a capital asset and not stock in trade.
The dividend income, in the hands of a non-resident person (Including FPI and non-resident Indian citizen) is taxable at 20% without providing for any deduction under any provisions of the Income tax Act. However, where dividend is received in respect of GDRs of an Indian company or Public Sector Company purchased in foreign currency, the tax shall be charged at the rate of 10% without providing for any deductions.
The relevant section under which tax is charged and tax is withheld on dividend distributed or paid to a non-resident shareholder is explained in following table:
|Section (chargeability of income)||Section (withholding of tax)||Nature of Income||Tax Rate||Withholding tax rate (TDS Rate)|
|Section 196C||Dividend on GDRs of Indian company or public sector company (PSU) purchased in foreign currency||10%||10%|
|Section 115AD (FPI)||Section 196D||Dividend income of FPIs from securities||20%||20%|
|Section 195||Dividend income of non-resident Indian from shares of an Indian company purchased in foreign currency||20%||20%|
(Non-resident or foreign co.)
|Section 195||Dividend income of non-resident in any other case||20%||30% (payee is non-resident other than company)
40% (payee is a company)
However before making application for treaty benefits, one must consider the careful analysis of beneficial ownership, wordings of the Most Favoured Nation Clause (MFN) and amendments made under the Multilateral Instruments to which India is a signatory.
However, one of the most significant impact of the current changes in the hands of the non-resident is, that the TDS deducted by Indian company at the time of payment of dividend, will now be available as a credit to the non-resident in its country of residence. The extent of availability of credit shall depend on the respective treaties and on the domestic tax laws of the country of residence.