The implied policy of the Indian Government is to avoid double taxation on income from same source and DTAAs with various countries are model examples of this policy.

Previously, before the Introduction of the Section 115BBDA, there was criticism regarding double taxation on income to the shareholder on dividend as the Government is already levying Dividend Distribution Tax u/s 115-O.

Double Taxation is an occurrence where the income from the same source is taxed twice before translating into net income. This corporate phenomenon occurs because company’s income is taxed at the corporate level and taxed again when distributed to shareholders through dividends. In other words, this is a tax policy where the Government taxes income when the company receives it and taxes the same income again when it is passed on to the owners of the company.

However, with the introduction of the Section 115BBDA in the Income Tax Act, 1961 by the Finance Act, 2016, w.e.f. 1-4-2017 the Government is levying 3 times tax on same source of Income. As per said section, when the shareholder receives the dividend in aggregate of more that Rs. 10 lakhs, then such shareholder have also to pay Income Tax. Therefore, effectively the Government is collecting 50.35% tax on same source of Income. The working of the same is explained in table as Annexed hereunder.

Now as per the current provisions of the Act, at first company is paying income tax under normal provisions (i.e. 30% Tax + 10% Surcharge + 3% Educations Cess).

Secondly, when the company is distributing the same profit to the owners / shareholders then the company is also paying Dividend Distribution Tax u/s 115-O (i.e. 15% + 12% Surcharge + 3% Education Cess on Gross Basis, effectively the Government is levying 20.92% on distributed dividend).

Thirdly, when the shareholder receives the same dividend in aggregate of more that Rs. 10 lakhs, then such share holder have also to pay Income Tax (i.e. Tax as per Section 115BBDA @ 10% + 3% Education Cess).

Extract of Section 115BBDA of Income Tax Act, 1961:-

[Tax on certain dividends received from domestic companies.

115BBDA.

(1) Notwithstanding anything contained in this Act, where the total income of [a specified assessee], resident in India, includes any income in aggregate exceeding ten lakh rupees, by way of dividends declared, distributed or paid by a domestic company or companies, the income-tax payable shall be the aggregate of—

(a) the amount of income-tax calculated on the income by way of such dividends in aggregate exceeding ten lakh rupees, at the rate of ten per cent; and

(b) the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the amount of income by way of dividends.

(2) No deduction in respect of any expenditure or allowance or set off of loss shall be allowed to the assessee under any provision of this Act in computing the income by way of dividends referred to in clause (a) of sub-section (1).

[Explanation.—For the purposes of this section,—

(a) “dividend” shall have the meaning assigned to it in clause (22) of section 2 but shall not include sub-clause (e) thereof;

(b) “specified assessee” means a person other than,—

(i) a domestic company; or

(ii) a fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10; or

(iii) a trust or institution registered under section 12A or section 12AA.]]

Special Provisions Relating To Tax On Distributed Profits Of Domestic Companies

Tax on distributed profits of domestic companies.

115-O. (1) Notwithstanding anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2003, whether out of current or accumulated profits shall be charged to additional income-tax (hereafter referred to as tax on distributed profits) at the rate of fifteen per cent:

[Provided that in respect of dividend referred to in sub-clause (e) of clause (22) of section 2, this sub-section shall have effect as if for the words “fifteen per cent”, the words “thirty per cent” had been substituted.]

…………

Practical Example of Triple Taxation under Income-tax Act, 1961 under three different situations

a. From the Perspective of the Company

Sr. No.
From the Perspective of the Company
Situation – 1
Situation – 2
Situation – 3
No dividend Distributed
50% dividend Distributed
100% dividend Distributed
1
Net Profit of the Company
10,00,00,000
10,00,00,000
10,00,00,000
2
Total Income tax
3,30,63,000
3,30,63,000
3,30,63,000
a
Normal Taxation
3,00,00,000
3,00,00,000
3,00,00,000
b
Surcharge
21,00,000
21,00,000
21,00,000
c
Education Cess
6,42,000
6,42,000
6,42,000
d
Secondary and Higher Secondary Education Cess
3,21,000
3,21,000
3,21,000
3
Profit after Tax – Available for Distribution (1-2)
6,69,37,000
6,69,37,000
6,69,37,000
4
Dividend Distributed
3,34,68,500
6,69,37,000
a
dividend to Shareholder
2,76,77,111
5,53,54,221.52
b
dividend Distribution Tax
57,91,389
1,15,82,778

b. From the Perspective of the Shareholder

Sr. No.
From the Perspective of the Shareholder
Situation – 1
Situation – 2
Situation – 3
No dividend Distributed
50% dividend Distributed
100% dividend Distributed
5
Dividend Received (as per 4a above)
2,76,77,111
5,53,54,222
6
Total Shareholders (Assuming)
50
50
50
7
Total Dividend to Each Shareholder
5,53,542
11,07,084
8
Taxation in hands of Shareholder
1,14,030
(as per section 115BBDA)
(NIL, as the amount to each share holder is less than Rs. 10 Lakhs)
(10%+3% ed. cess, as the amount to each share holder is more than Rs. 10 Lakhs)
Net Amount in the hands of the shareholder
5,53,542
9,93,055

c. Overall Perspective

Sr. No.
Overall Perspective
Situation – 1
Situation – 2
Situation – 3
No dividend Distributed
50% dividend Distributed
100% dividend Distributed
1
Net Profit Earned by the Company
10,00,00,000
10,00,00,000
10,00,00,000
Income Tax Paid by the Company
3,30,63,000
3,30,63,000
3,30,63,000
Total Dividend Distribution Tax
57,91,389
1,15,82,778
Total Tax on Dividend Paid by Shareholders
3,30,63,000
3,88,54,389
57,01,485
5,03,47,263
(amount as per 8 above x 50 share-holders)
2
Net Amount Available to Share Holders
6,69,37,000
6,11,45,611
4,96,52,737
3
Percentage of Total Tax on Same Source of Income
33.06%
38.85%
50.35%

The Author is a Chartered Accountant and can be reached at harchandanimanish@gmail.com, Reader’s feedback / observations are welcomed and would be appreciated.

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor Taxguru.in and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.

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Tags : Budget (1957) Budget 2018 (400) income tax act 1961 (272)

3 responses to “Triple Taxation under Income Tax Act, 1961 after introduction of Section 115BBDA”

  1. Tejesh Mopuri says:

    Sir in the above computations grossing up is not taken in to consideration . Is there any logic behind it , and please explain when does the concept of grossing up apply (in what all circumstances).

  2. Shruthi Prasad says:

    Please clarify if the tax is charged on divident in excess of 10 lakhs or on entire agreggate dividend received. thanks

  3. Ashi says:

    Application of Section 115BBDA and TDS at 10% is inclusive of cess.

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