All corporate players in India rejoiced on February 1, 2020 when the Finance Minister abolished dividend distribution tax (DDT). The plan was to shift the incidence of taxation of dividend income in the hands of investors.
While this change may yield benefits to many, needless to say, you have to lose something to gain something. Along with the abolition of DDT, there have also crept in many other consequential changes which may affect the corporates as well as individual taxpayers.
During the DDT regime, all domestic companies were required to pay tax on dividends declared/paid @ 15% plus surcharge and education cess, consequentially relieving investors from the incidence of taxation. Later, with an aim to tax the super-rich, the Finance Act 2016, brought within its ambit, taxation of divided income in the hands of investors earning dividend more than Rs 10 lakh in one Financial Year (‘FY’). By virtue of this, the investors were required to pay taxes @ 10% plus surcharge and education cess, on the dividend income exceeding Rs 10 lakh.
Now that the Finance Act 2020 (‘the Act’) has scrapped these provisions and the incidence of tax has shifted to investors, effective April 01, 2020, domestic companies are required to deduct taxes @ 10% on the dividends paid to resident investors (except in cases where dividend income does not exceed Rs 2,500 in a particular FY provided it is paid by an account payee cheque) and @ 20% on dividends paid to non-resident investors. However, dividends declared during FY 2019-20 and paid during FY 2020-21, on which DDT has already been deposited, will be exempt in the hands of investors.
While the taxpayers are required to pay taxes on dividend income at the applicable tax rates, some relief has been granted by restricting the surcharge rates to a maximum of 15%, which could have otherwise gone up to 37% in case of high net worth individuals. The foreign investors will however have an upper hand over the resident investors as they will be in a position to avail beneficial rates under the applicable tax treaty, due to which tax rates can be as low as 5% for them. Further, the Act has granted a miniscule relief to taxpayers by capping the interest expense deduction (relatable to the dividend income earned) to 20% of the dividend income earned - this being the only allowable deduction. On the other hand, for corporates, erstwhile provisions of income-tax have been reinstated whereby the cascading effect of taxes on inter-corporate dividends will be eliminated. By virtue of this, when a domestic company receives dividend either from another domestic company, a foreign company or a business trust, and subsequently distributes the same to its shareholders, it shall be allowed a deduction of an amount which is lower of the dividends received or distributed.
As per Minimum Alternate Tax (MAT) provisions, dividend income received by domestic companies (in addition to the dividend paid) is required to be added while computing book profits. This provision held water during DDT times, when dividend was exempt in the hands of the recipient. However, in today’s scenario, where dividend income is taxable, this provision will result in double taxation unless a provision of tax relief similar to the aforesaid provision is introduced to plug double taxation. Abolition of DDT will surely make the Indian-equity markets more attractive and increase the foreign investment in India. However, due to COVID-19 outbreak across the globe, chances of increasing foreign investment at this stage are remote. Nonetheless, once the spread of this virus is suppressed, India will surely be in a position to set the stage for a much hopeful tomorrow!
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