In this blog post, Anusha of Dr. Ram Manohar Lohiya National Law University and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the applicability of Dividend Distribution Tax.
A dividend is usually a distribution of the profits of the company to its shareholders. When a corporation earns a profit or surplus, it can re-invest it in the business (called retained earnings), and pay a fraction of the profit as a dividend to shareholders.
Dividend Distribution Tax (hereinafter ‘DDT’) is an additional amount of tax (under S.115-O Income Tax Act, 1961) to be paid, in addition to the income tax chargeable in respect of the total income or even if there is no income tax payable on total income computed in accordance with Income Tax Act, 1961 (hereinafter ‘the Act’), by every company which declares, distributes or pays dividend to its shareholders for a particular assessment year. It is to be noted that DDT is applicable only on domestic companies and foreign companies are exempted from it.
DDT is also relevant to mutual funds wherein any dividends which are declared by the fund houses are exempt from tax in the hands of investors and is levied at 25% on dividends paid by money market mutual funds and liquid mutual funds to all investors. However, in debt mutual funds, Asset Management Companies (AMCs) pay DDT from the distributable income at the rate of 28.33% (including surcharge and cess, for Individuals and HUF investors). There is, however, no DDT charged for equity mutual funds.
Effective Rate of Dividend Distribution Tax:
S.115-O(1) of the Act provides for dividends to be charged at 15%. Such dividend includes interim dividend and it can be paid out of either current or accumulated profits.
Effective rate of DDT, however, can be calculated as tax on distributed profits at 15% + surcharge at 12% + education cess at 2% + SHEC (secondary and higher education cess) at 1% of the amount of dividend. Thus, the effective rate of DDT comes out to be 20.358%.[1]
Tax on dividend amount received from subsidiary company:
With a view to remove the cascading effect of DDT in multi-tier corporate structure, the Finance Act, 2013 had provided for the benefit of reduction of dividend from a foreign subsidiary to a domestic company. Also, dividend received by any company from its subsidiary which has been subjected to DDT shall be liable to be reduced from the amount of dividend distributed by such recipient shareholder company. Hence, now the dividend received by the domestic company from its foreign or domestic subsidiary is reduced from dividend declared, distributed or paid by the domestic company and DDT is levied on the reduced amount.
S.115-O(1A) of the Act was substituted by the Finance Act, 2013. The amount referred to in S.115-O(1) of the Act shall be reduced by,
- The amount of dividend, if any, received by the domestic company during the financial year, if such dividend is received from its subsidiary and,
- Where such subsidiary is a domestic company, the subsidiary has paid the tax which is payable under this section on such dividend; or
- Where such subsidiary is a foreign company, the tax is payable by the domestic company under S.115BBD of the Act on such dividend;
Provided that the same amount of dividend shall not be taken into account for reduction more than once.
- The amount of dividend, if any, paid to any person for, or on behalf of, the New Pension System Trust referred to in clause (44) of S.10.
No tax on dividend by domestic company to business trust:[2]
No tax on distributed profits shall be levied under S.115-O of the Act in respect of any amount declared, distributed or paid by the specified domestic company (domestic company in which a business trust has become the holder of whole of the nominal value of equity share capital of the company) by way of dividends to a business trust (which either holds 100% of the share capital of the SPV or holds all the share capital other than that which is required to be held by any other entity as part of any direction of any Government) out of its current income on or after April 1, 2016.
Exemption from DDT has been provided on distribution made by SPV to business trust (REIT and INVITs). As per the current legislation, dividend received by a business trust from a special purpose vehicle (SPV) is subject to DDT at the SPV level but the same is exempt in the hands of the business trust. This exemption is restricted to payments made out of current income after the date when the business trust acquires the requisite shareholding in the SPV.[3]
No DDT for unit of an International Financial Services Centre:[4]
No tax on distributed profits shall be levied on a company, being a unit of an International Financial Services Centre (IFSC), deriving income solely in convertible foreign exchange, for any assessment year on any amount declared, distributed or paid by such company, by way of dividends on or after the April 1, 2017 out of its current income either in the hands of the company or the shareholders.
Exemption to shareholders:
The Dividend Distribution Tax is levied at the time when company distributes, declared or pays any dividend to its investor/shareholders. Hence, the amount of dividend received by the shareholders of such a company is not included in the total income of the shareholder because such dividend is exempted under S.10 (34) of the Act. Therefore, dividend received from domestic company is not taxable in the hands of the shareholders.
However, deemed dividend received under S.2 (22)(e) of the Act from an Indian company or any dividend received from a foreign company is taxable in hands of the shareholder as per normal income tax slabs.
But a surprising change has been the introduced by the Finance Minister in Budget 2016. A new dividend tax[5] is to be levied in the hands of an identified class of shareholders, i.e. those who receive dividend of more than INR 10 Lakh in any financial year (being an individual / Hindu Undivided Family (HUF) / firm)[6]. This is a new tax apart from the existing dividend distribution tax which is levied in the hands of the company paying dividend.[7]
Exemption to Special Economic Zones (hereinafter ‘SEZ’) revoked:[8]
Until the financial year 2010-2011, Dividend Distribution Tax provisions were not applicable to SEZ developers. However, this benefit has been taken away by the Finance Act, 2011 with effect from June 1, 2011. So, even SEZ developers are required to pay DDT on dividends declared, distributed or paid on or after June 1, 2011.
Time limit for payment of Dividend Distribution Tax:
DDT has to be paid to the credit of the central government within 14 days from the date of declaration, distribution or payment of any dividend whichever is earliest by the principal officer of the domestic company.
As per sub-section (4) of S.115-O of the Act, the tax on distributed profits so paid by the company shall be treated as the final payment of tax in respect of the amount declared, distributed or paid as dividend. Therefore, no further credit shall be claimed by the company or by any other person in respect of the amount of tax so paid.
Also, no deduction under any other provision of the Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to Dividend Distribution Tax.
Amendments proposed in Budget, 2016:
- No Dividend Distribution Tax for Real Estate Investment Trusts (REIT) and Infrastructure Investment Trusts (InvIT). Any amount of dividend distributed by Special Purpose Vehicles (SPVs) to the REITs and InvITs would not be subject to Dividend Distribution Tax (DDT) subject to condition that:
- Such SPVs must be 100% owned by REIT and InvIT; and
- Such amount of dividend should be paid out of current income and not from accumulated income.[9]
- To promote growth of IFSCs into world class services hub, no DDT is to be levied on a unit of an International Financial Services Centre:[10]
- No tax to be levied on dividend by domestic company to business trust:[11]
- Dividend tax to be levied on individuals whose income from dividends is or exceeds INR 10 Lakh in an assessment year.
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References:
[1] ‘India Tax Profile’ (KPMG, June 2015) < https://home.kpmg.com/content/dam/kpmg/pdf/2015/10/india-2015.pdf> accessed 29 August 2016.
[2] Allirajan Muthusamy, ‘Budget 2016: Why a new additional tax on dividend income may not hit promoters much’ The Economic Times (Mumbai, 2 March 2016)
<http://economictimes.indiatimes.com/articleshow/51221423.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst> accessed 29 August 2016.
[3] ‘Budget 2016: Key Tax Proposals’ (Trilegal, 2 March 2016)
<http://www.mondaq.com/india/x/470606/tax+authorities/Budget+2016+Key+Tax+Proposals> accessed 28 August 2016.
[4] ‘The Finance Bill, 2016 Direct Tax Highlights’ (DSK Legal)
<http://dsklegal.com/pdf/2016/Direct_Tax_Highlights_2016_DSK_LEGAL.pdf> accessed 28 August 2016.
[5] S.7, Finance Act, 2016.
[6] Budget 2016 (n 3 ).
[7] Nishith Desai, ‘India Budget 2016: Worth An Oscar Or Two, But Not A Clean Sweep!’
<http://www.mondaq.com/india/x/470560/Capital+Gains+Tax/INDIA+BUDGET+2016+WORTH+AN+OSCAR+OR+TWO+BUT+NOT+A+CLEAN+SWEEP> accessed 27 August 2016.
[8] Rupesh Jain and Puneet Kundra, ‘Indian Income Tax Law – A Brief Guide’ (Vaish Associates Advocates)
<http://www.mondaq.com/pdf/clients/457368.pdf> accessed 26 August 2016.
[9] Manoj K Singh, ‘Key Highlights of Union Budget 2016-17’ ( Vol IX Issue III, Indian Legal Impetus, March 2016) <http://singhassociates.in/UploadImg/NewsImages/Vol%20IX%20Issue%20III.pdf> accessed 27 August 2016.
[10] The Finance Bill (n 4).
[11] Allirajan (n 2).
