Presently, if an investor gets dividend in respect of investment made by him in any domestic company or units of a mutual fund then he shall not be liable to pay any tax on such dividend by virtue of exemption under section 10(34) and 10(35) of the Act. However, in such cases, the company or mutual fund shall be liable to pay distribution tax under section 115-0 and Section 115R.
Though this taxation system has its advantages as collection of tax is administratively easier, compliance burden on the taxpayer is minimal and the receipt of the tax revenue is assured, including from non-residents. But, this taxation regime is also plagued with several problems and is currently being viewed by the corporate sector as burdensome and regressive as DDT is levied at a flat rate on the distributed profits, across the board irrespective of the marginal rate at which the recipient is otherwise taxed. Further, with the advent of technology and easy tracking system available, the justification for current system of taxation of dividend has outlived itself.
Thus, in view of above, the Government has proposed to move to the classical system of taxation of dividends in the hands of the shareholder only.
Hence, no DDT shall be payable by the company or mutual fund on any dividend distributed on or after April 1, 2020.
Currently, no Dividend Distribution Tax (DDT) is payable in the following cases:
(a) Dividend paid to Business Trust
Dividend Distribution Tax is not payable by a domestic company in respect of amount of dividend declared, distributed or paid by it to a business trust. The exception shall apply only if business trust holds whole of the nominal value of equity share capital of the company and dividend is paid out of its current income on or after the date of acquisition of said holding by the business trust.
(b) Dividend paid by a Co. in IFSC (International Financial Services Centre)
No dividend tax shall be payable in respect of dividend declared or paid or distributed by a company, being a unit of an International Financial Services Centre, out of its current income or income accumulated after 1st April 2017 as a unit of IFSC provided it derives income solely in convertible foreign exchange.
In this regard, various amendments have been proposed in the Income-tax Act which are as follows:
(a) No DDT on Dividend distributed on or after April 1, 2020
Section 115-0 and section 115R are proposed to be amended to provide that a domestic company or mutual fund shall not be liable to pay DDT on any dividend distributed on or after April 1, 2020. However, income of a mutual fund shall continue to be exempt under section 10(23D) though it would not be liable to pay distribution tax.
(b) Tax on Dividend shall be levied in the hands of Shareholders or Unit Holders
Section 10(34) and section 10(35) which provides for exemption in respect of dividend received by shareholder or unit holders are proposed to be amended to provide that no exemption shall be available in respect of dividend received on or after April 1, 2020. Further, sections 115A, 115AC, 115ACA and 115AD are proposed to be amended to provide for the taxability of dividend in case of non-resident, FPIs or GDR5 purchased in foreign currency.
(c) Taxability of Dividend received from REITs or InVITs
Real Estate Investment Trusts (REITs) and InVITs have been provided pass-through status under the Income-tax Act whereby certain incomes, inter-alia, interest, rental income is taxable in the hands of unit holders and not trust. As dividend income shall now be taxable in the hands of unit holders, consequent amendments have been proposed to section 10(23FC), 10(23FD) and section 115UA.
The taxability in case of REITs or InVITs can be understood with the help of following table.
Tax on Business Trust and its Unit Holders
|Business Trust||Business Trust||Unit Holders||Unit Holders|
|Taxability||Tax Rate||Taxability||Tax Rate|
|Interest from SPV||Exempt||–||Taxable||Applicable|
|Dividend from SPV||Exempt||–||Taxable||Applicable rates|
|Rental Income of REITs||Exempt||–||Taxable||Applicable|
|Rental Income of InVITs||Taxable||42.744%||Exempt||–|
(Except those taxable under sections
111A and 112)
|Any other Income||Taxable||42.744%||Exempt –||–|
(d) Allowability of Expense from Dividend Income
Section 57 is proposed to be amended to provide that an assessee can claim deduction of interest incurred to earn dividend income. However, the total amount of deduction cannot exceed 20% of the dividend income. Further, no deduction shall be allowed in respect of sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such dividend.
(e) Deduction in case of Inter-Corporate Dividends
Where a domestic company receives dividend from another domestic company, a new section 80M is proposed to be inserted to remove the cascading effect which may arise due to abolition of DDT and taxability of dividend income in hands of shareholders.
It has been proposed that inter-corporate dividend shall be allowed to be reduced from total income of company receiving the dividend if same is further distributed to shareholders one month prior to the due date of filing of return.Where a domestic company has claimed deduction in respect of the amount of dividend distributed by the domestic company, no deduction shall be allowed in respect of such amount in any other previous year.