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A dividend is a share of profit given by a company to its shareholders out of current or accumulated profits. Section 115-O of the Income Tax Act 1961, 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 charged to additional income-tax at the rate of 15%. The tax so paid by the company is called dividend distribution tax (DDT). The effective rate of dividend distribution tax for AY 2020-21 is 20.55529% approximately.
Through Finance Act, 2020, some amendments have been made in The Income Act, 1961, one of such amendments includes:
Removing dividend distribution tax (DDT) and moving to classical system of taxing dividend in the hands of shareholders/unit holders wherein dividend income will be taxable in the hands of recipients with effect from 1st April, 2020 and therefore, the tax will be deducted at source (TDS) on the Dividend payable at the prescribed rates. However, no TDS shall be deducted on the Dividend payable to a resident Individual if the total dividend to be received during FY 2020-21 does not exceed Rs. 5,000.
Under the Current Tax Regime, Indian companies are required to pay tax at an effective rate of 20.56% on their distributable profits. The provisions relating to DDT are governed by Section 115-O. Some of the key points are:
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 present system of taxation of dividend in the hands of the company/ mutual funds was reintroduced by the Finance Act, 2003 (with effect from the assessment year 2004-2005) since it was easier to collect tax at a single point and the new system was leading to increase in compliance burden. However, with the advent of technology and an easy tracking system available, the justification for the current system of taxation of dividends has outlived itself.
Given above, it is proposed to carry out amendments so that dividends 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.
Now, Indian companies are not required to pay dividend distribution tax on their distributable profits. So, the shareholders will get their full share of profit and not after the Net of dividend Distribution Tax.
The benefit of abolished DDT will depend on the tax bracket that the individual investors fall into. Few examples have been given below:
Read: ITC Statement Form GSTR-2B for the month of July 20, made available on GST Portal for taxpayers
However, as per Section 90 read with Section 195 of the Income-Tax Act, the non-resident shareholder has the option to be governed by the provisions of the Double Tax Avoidance Agreement (“DTAA“) between India and the country of tax residence of the shareholder if they are more beneficial to them.
Where the amount of dividend paid or distributed by a company is Rs 85, then DDT will be calculated as follows:
Dividend amount distributed | Rs 85 |
Increase by Rs 15 [ i.e. (85 * 0.15)/ (1-0.15)] | Rs 15 |
Increased amount | Rs 100 |
DDT payable under section 115-O is @ 15% of Rs 100 | Rs 15 |
Dividend distributed to shareholders | Rs 85 |
Effective rate of dividend distribution tax | |
The effective rate of dividend distribution tax payable shall be as under: | |
Tax Payable under section 115-O on Rs 85 distributed | Rs 15 |
Therefore DDT rate on Rs 100 distributed shall be 15/85*100 | 17.64706% |
Add: Surcharge @ 12% of 17.64706 | 2.11765% |
Total | 19.76471% |
Add: H&EC @ 4% | 0.79059% |
Total effective DDT rate applicable will be | 20.55529% |
Hence, the effective rate of DDT has been increased to 20.55529% approximately.
Alternatively the net amount of dividend paid on distributed should first be grossed up and DDT should be paid @ 17.42% (15%+12% SC+ 4% H&EC).
The effective rate of DDT is 20.55259% approximately.
Section 115-O of the Income Tax Act 1961, 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 charged to additional income-tax at the rate of 15%. The tax so paid by the company is called dividend distribution tax (DDT).
Yes. Dividend distribution tax has been abolished. now, the dividend will be taxable in the hands of shareholders/unit holders (recipients).
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