Triple Taxation under Income Tax Act, 1961 after introduction of Section 115BBDA

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

b. From the Perspective of the Shareholder

c. Overall Perspective

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

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