Under existing provisions, DDT was payable in addition to the regular Income tax payable by the company. Similar provisions are also given for income distributed by mutual funds to its unit holders.
However, amendment has made the dividends taxable in the hands of investors as per their taxable slabs.
E.g.,In case income of a person falls in the 30% tax rate slab then he would pay tax at that 30% rate and if another person’s income falls in the 20% tax rate slab then he would pay tax @ 20% on such dividend income .
The taxation of dividends is a subversively different position different from what it currently exists.
1. What is Dividend Distribution Tax i.e DDT?
Dividend Distribution Tax (DDT) is a tax imposed on dividends that companies distribute to their shareholders out of their profits or Income that Mutual funds or Unit Trust of India distributes to its unithholders out of its profit..
As per the general concept of Income tax, Income is taxable in hands of the recipient of Income. However, in case of dividend income, tax is payable by the company at the time of declaring such dividend.
Companies are required to pay DDT @15% in addition to the dividend declared, i.e., such tax is not deducted from dividend amount.
Therefore, domestic companies have an additional burden of tax on them. Currently, DDT stands at 15%, which only applies to all the domestic companies.
2. When companies pay Dividend Distribution Tax ?
2.1 DDT on dividend distributed by Domestic Company (Section 115-O of Income Tax Act, 1961)
Every domestic company must pay Dividend Distribution Tax on dividends declared, distributed or paid by such company whether such dividend is declared out of current year profit or accumulated profits.
Liability to pay DDT is applicable on interim dividend also.
All domestic companies are liable to pay DDT irrespective of their liability of Income tax, i.e., whether a company is liable to pay income tax or not in current year but still company will be liable to pay DDT.
Further, liability of DDT is in addition to the dividend declared by the company.
E.g., A limited declared dividend of INR 1,00,000. Then, at the time of distribution of dividend, Company will be liable to pay DDT @ 15%, i.e., 15,000 to the account of government. Company shall pay such amount in addition to the INR 1,00,000.
Further, the Company will not get any deduction of such DDT from final income tax liability.
2.2 DDT on income distributed by Unit Trust of India and Mutual Funds (Section 115R of Income tax Act, 1961)
Similar to the Domestic companies, Unit Trust of India and Specified companies* or Mutual funds are liable to pay DDT on incomes distributed to unit holders.
(*“specified company” means a company as referred to in clause (h) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002)
3. What are the Applicable rates of DDT?
Different rates of DDT are prescribed for different nature of Incomes. Following is rate of DDT applicable:
|Payer||Recipient||Rate of DDT|
|Domestic Companies||Any person||15%|
|Domestic Companies||Any person(Dividend referred to in Section 2(22)(e))||30%|
|Unit Trust of India||Any person||10%|
|Specified Companies or Mutual Funds||An individual or a Hindu undivided family by a money market mutual fund or a liquid fund||25%|
|Specified Companies or Mutual Funds||any other person by a money market mutual fund or a liquid fund||30%|
|Specified Companies or Mutual Funds||any person by an equity oriented fund||10%|
|Specified Companies or Mutual Funds||an individual or a Hindu undivided family by a fund other than a money market mutual fund or a liquid fund or an equity oriented fund||25%|
|Specified Companies or Mutual Funds||any other person||30%|
4. What is the Due date of payment of Dividend Distribution Tax?
Dividend distribution tax should be paid within 14 days from earlier of the following dates:
- Declaration of Dividend; or
- Distribution of dividend; or
- Payment of Dividend
However, in the case of non-payment of tax within 14 days, the company would be liable to pay interest at the rate of 1% per month from the date following the date on which DDT is payable and till the date of actual payment. Please note that part of the month is taken as a whole month.
DDT is payable separately above & over the income tax liability of the company where no credit or deduction is allowed to the company for DDT paid.
5. Rational behind removing Divident Distribution Tax provisions in Budget 2020?
Dividend distribution Tax was introduced by Finance Act, 2003 (applicable with effect from Assessment year 2004-05) as it was easy to collect tax at single point at that point of time.
However, with the advent of technology and easy tracking system available, the justification for current system of taxation of dividend has outlived itself.
Further, Under section 115-O and 115R, dividends are taxed in the hands of companies or Mutual funds or Unit trust of India proclaiming dividends at the time of distribution.
It creates vertical discrimination amongst the tax players as dividend is tax at same rate irrespective of rate at which income of recipient is otherwise taxed.
E.g. Recipient who have the high dividend income should charge income tax @ 30% and those have income in lower slab should pay income tax at lower rate or NIL rate. Whereas, DDT is paid on such dividend income @ 15% irrespective of income of shareholders.
Therefore, Finance Act, 2020 has proposed to remove concept of DDT itself and Income should be taxed in hands of the recipient as per his applicable tax rate.
6. Taxability of Dividend income in hands of Recipient before Budget 2020
Section 10(34): Section 10 provides for all exempted income which is not chargeable to income tax under income tax act 1961. Section 10 (34) of the Income Tax Act, 1961 allocates dividend income as exempted which is received from all the domestic companies.
A major reason for providing an exemption of dividend income received by the beneficiary is the Dividend distribution tax on the dividend that is already imposed on the company and paid by the company at the time of distributing the dividend.
Section 10(35): Similarly, Section 10(35) provides for exemption for income received from Mutual Funds or Unit Trust of India as the payer has already paid tax on such income tax at the time of distribution of Income.
Section 115BBDA: DDT is payable by Domestic companies @ 15% irrespective of tax rate at which Income of recipient is taxable.
Therefore, it created vertical inequity among shareholders and those who had high income dividend income pays tax @15% only instead of 30%.
Therefore, a new section 115BBDA was introduced by Finance Act, 2016 which provide that where total income of any person (other than Domestic Companies) includes dividend income more than INR 10 Lacs then recipient is liable to pay income tax rates on such additional dividend income (i.e., in excess of INR 10 lacs) @ 10%.
E.g. Total Income of a person is INR 25,00,000 (INR 15,00,000 Dividend Income and INR 10,00,000 other taxable income). Then such person shall pay income tax of INR 50,000 (5,00,000*10%) on dividend Income in addition to regular income tax liability.
7. TDS On Dividend Income before budget 2020
However, no liability to deduct TDS is applicable if the company has paid DDT on such income.
Further, company is not liable to deduct TDS on dividend payable to Individual not exceeding INR 2,500 and payment is made through Account paying cheque.
Similar exemptions are also given under various other TDS provisions in respect of income on which DDT has been paid.
8. What are the changes in dividend distribution tax after budget 2020?
Finance Act, 2020 has proposed to eradicate the provisions of DDT for dividend provided on or after 01.04.2020 and therefore, dividend income and income from units will be taxable in hands of recipients.
Domestic Companies and Specified Companies and Mutual Funds will not be liable to pay any DDT from 1st April 2020 onwards.
The government proposes to take the intrepid step of annihilating the DDT & conveying the burden of tax on dividends to the recipient shareholders from the domestic companies.
All the withholding taxes are proposed to be done under section 194 for the recipients of residents at the rate of 10%. So the shareholders can claim the deduction of all the expenses of interest & 20% of the dividend income.
In various structures of companies, the surging effect of tax on the dividend is proposed under the section of 80M to remove the re-introduction of deduction.
The deduction would be underneath of the dividend received from the dividend & domestic company paid by the recipient of the domestic company.
The current scenario is the deduction that is available in respect of the dividend obtained from the foreign subsidiary for the purpose of estimation of DDT shall not be available for the purpose of a section of 80M.
9. How Dividend will be taxed in the hands of companies from 1st April 2020 onwards
Before 1st April 2020, companies used to deposit dividend distributions tax as per applicable rates. From 1st April 2020, no dividend distribution tax would be deposited by companies.
9.1. No Dividend distribution tax from 1st April 2020 in the hands of companies
Section 115O and 115R are proposed to amend that provisions of this section shall apply on Dividend or Income distributed till 31st March, 2020.
Accordingly, companies will not be liable to pay DDT on dividend declared after such date.
9.2. TDS on dividend distribution or dividend income from 1st April 2020
Section 194: This section has been amended to provide for TDS on dividend distributed by Companies.
However, no TDS shall be deducted if the payment of dividend is made to Individual upto INR 5,000 and payment is made by any mode. Similar amendment is also proposed in other sections of TDS wherein waiver is granted on account DDT paid under section 115O.
10. How Dividend will be taxed in the hands of recipient from 1st April 2020 onwards
10.1 Tax on Dividend income as per applicable Income tax rates of recipients
Section 10: As section 10(34) and section 10(35) are proposed to remove the exemption provided earlier for Dividend on which DDT has been paid.
Therefore, Dividend Income and Income from units will no longer be considered as exempted income in hands of the recipient.
Therefore, recipient will be liable to pay income tax on such income at applicable slab rate.
Section 115BBDA: as per section 115BBDA of the Finance Act, 2016, where the amount of dividends exceeds Rs. 10 lakhs, then the individuals or the Hindu undivided family whoever receives the dividend amount need to pay tax at the rate of 10% on income exceeding INR 10,00,000.
This section was introduced to reduce imparity. However, as dividend income is now taxable in hands of recipient, therefore, section 115BBDA has been restricted to income received till 31st March, 2020.
10.2 Tax on Dividend income by Non-Resident and foreign companies
Section 115A: It provides for taxability on Dividend, Royalty and Technical Fees in the hands of non-resident and foreign companies.
Earlier, Dividend under section 115O was excluded for the purpose of section 115A. However, Finance Act, 2020 has proposed to remove such exclusion.
Therefore, dividend Income shall be taxed at the rate of 20% in hands of non-resident shareholders. Non-resident shareholders can also apply for the rate given in the tax-treaty as per the beneficial provision under section 90(2).
However, till the time the finance ministry has not proposed any specific rate for the resident shareholders. Hence, resident shareholders need to pay tax at the slab rate under the Finance Act.
10.3 Deduction of Interest Expenses incurred to earn dividend income
Section 57: This section provides for deduction of expenses from income under head other sources. As dividend income is taxable in the hands of recipients, therefore, the recipient will be entitled to claim deduction of interest expense incurred to earn such dividend income and such deduction shall not be more than 20% of dividend Income.
That’s all from our end. We have already discussed all the changes related to Dividend Distribution that the finance ministry has proposed in Budget 2020.