Removing the Dividend Distribution Tax (DDT) and taxing dividend in hands of shareholders/Unit holders
Amended by Finance Act, 2020
Previous Year 2020-21 (i.e. Assessment Year 2021-22)
The present system of taxation of dividend in the hands of company/ mutual funds was introduced by the Finance Act, 2003 (with effect from the assessment year 2004-05), since it was easier to collect tax as dividend distribution tax (DDT) from company/mutual fund at a single point. This system was leading to increase in compliance burden.
Moreover, the present provisions levy tax at a flat rate on the distributed profits, irrespective of the marginal rate at which the recipient is otherwise taxed. The provisions are hence, considered, regressive.
The dividend is income in the hands of the shareholders and not in the hands of the company. The incidence of the tax should be on the recipient. However, with the advent of technology and easy tracking system available, taxation of dividend in hands of recipient would be persist.
In view of above, Finance Act 2020, provides an amendment so that dividend or income from units are taxable in the hands of shareholders or unit holders at the applicable rate and the domestic company or specified company or mutual funds are not required to pay any DDT.
It is also provides that the deduction provides under the head “Income from Other Sources” for any sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such dividend or income from units shall not be exceed 20 % of the dividend or income from units under section 57 of the Act.
Therefore the dividend income/income from units received by the recipient, shall be taxable in their hands at respective applicable slab rates of income tax act, and company/mutual fund distributing such income shall not be liable to pay any dividend distribution tax (DDT) on such income.
However, Finance Act 2020 has also provides that, if Company/mutual fund has already paid the dividend distribution tax (DDT) on dividend and if any recipient of such income paid any tax under section 115BBDA in excess of Rs. 10 Lakh as per provisions of the act then recipient of income shall not be tax again under the amended provisions of the act.
Analysis of Amended/Inserted sections of Finance Act, 2020
Finance Act 2020, provides the following benefits to, recipient of dividend /income from unit holders and company/mutual fund paying dividend distribution tax (DDT):-
i. Amendment in section 115-O provides that, dividend declared, distributed or paid after 1st April 2020, shall be taxable in hands of shareholders/unit holders at their applicable slab rates.
ii. Amendment in section 115-O further provides that, domestic company shall not be liable be pay any dividend distribution tax (DDT) on dividend declared, distributed or paid out of its current or accumulated profits.
iii. Amended provision withdraw the tax exemption of dividend, provided to shareholders, under clause (34) of section 10 of act and the dividend will be tax in hand of recipient.
iv. Amended provision of section 115R, provides that company/mutual fund shall not be liable to pay additional income tax i.e. dividend distribution tax (DDT) on distributed income. However liability of TDS would be attracted under section 194. Whereas earlier provision of section 115R provides that, specified company or a mutual fund shall be liable to pay additional income tax (DDT) on income distributed to its unit holders at a rate of:-
25% on income distributed to Individual/HUF by money market/liquid fund.
30% on income distributed to any other person by money market/liquid fund.
10% on income distributed to any person by equity oriented fund.
25% on income distributed to Individual/HUF by a fund other than money market/liquid fund/equity oriented fund.
30% on income distributed to any other person by a fund other than money market/liquid fund/equity oriented fund.
v. Amended provision withdraw the tax exemption of income received in respect of units of Mutual Fund/Specified company, provided to unit holders, under clause (35) of section 10 of act and the income from units would be tax in hand of recipient.
vi. Amended provision of clause (23FC) of section 10 provides that, dividend received or receivable by a business trust from a special purpose vehicle (SPV) shall be exempt and dividend shall taxable in hands of shareholders of business trust.
vii. Amended provision of clause (23FD) of section 10, withdraw the tax exemption of unit holders and provides that, dividend income shall be taxable in hands of unit holders of business trust.
viii. Amended sub section (3) of section 115UA, provides that dividend income received by a unit holder from business trust treated as same nature of income as received by business trust from special purpose vehicle and would be taxed in the hands of unit holders of business trust.
ix. Amendment in sub section (3) of section 115UA further provides that, dividend income received by a business trust shall exempt in hands of business trust and taxed in hands of unit holders of business trust.
x. Newly inserted section 80M provides that, where gross total income of any domestic company includes any income by way of dividend from any other company/business trust, there shall allowed a deduction of dividend distributed by it, on or before the 1 month prior to the due date of filing of return of income under section 139(1).
xi. There is no tax would be levied under section 115BBDA (earlier dividend in excess of Rs. 10 Lakh was tax at the rate of 10%) on dividend received from domestic companies, therefore such dividend shall be taxed in individual hands as per their applicable slab rates.
xii. Deduction provides under the head “Income from Other Sources” for any sum paid by way of commission or remuneration to a banker or any other person for the purpose of realizing such dividend or income from units shall not be exceed 20 % of the dividend or income from units under section 57 of the Act.
xiii. Section 194 provides that, if aggregate amount of dividend, distributed or paid to a shareholders exceeds of Rs. 5000/- then company/mutual fund required to deduct tax (TDS) at a rate of 10%. However no tax would be deducted if it paid to LIC/GIC or beneficially owned by LIC/GIC.
xiv. Amended section 194LBA provides that, tax deduction (TDS) by a business trust would be at the rate of 10% on income paid to resident unit holders as well as non-resident unit holders.
xv. Newly inserted section 194K provides that, any person paying any income in respect of units of mutual fund in excess of Rs. 5000/- shall deduct tax (TDS) at the rate of 10%.
xvi. Amend the section 195 to delete the exemption of dividend received by any non-resident under section 115-O, there was no deduction of TDS in respect of such income.
xvii. As per the amendment in section 196A, if any person paying any income in respect of units of a mutual fund/specified company paid to a non-resident or to a foreign company, shall deduct tax (TDS) at a rate of 25%.
xviii. As per amendment in section 196C, if any person paying any income by way of dividend in respect of foreign currency bonds or global depository receipts deduct tax (TDS) at the rate of 10%
As per amendment in section 196D, a person paying any income in respect of dividend, to foreign institutional investor shall deduct tax (TDS) at a rate of 20%.
Case Study on amended tax regime for better understanding
Assessee Mr Ram (Individual, Aged 40 Years)
Income (excluding dividend) 10,00,000.00
Dividend 5,00,000.00
Total Income 15,00,000.00
Applicable Tax Rate (Under Old tax rate structure) 30%
Tax on Dividend Income u/s 115BBDA @ 10% 0.00
Tax liability on income excluding dividend 3,00,000.00
Tax liability on dividend (Earlier it was exempt)* 1,50,000.00
Total Tax liability 4,50,000.00
*Earlier there was no burden of tax liability in hands of individual shareholders. As per latest amendment such dividend income, increase the tax liability of individual shareholders by falling under higher slab rate.
Amendment/Insertion of sections by Finance Act 2020
The Finance Act 2020, amend/insert the following sections:-
i. Amend section 115-O to provide that dividend declared, distributed or paid after 1st April 2003, but on or before 31st March 2020 shall be covered under the provision of this section.
ii. Amend clause (34) of section 10 to provide that the provisions of this clause shall not apply to any income, by way of dividend, received on or after 1st April 2020.
iii. Amend the section 115R to provide that the income distributed on or before 31st March 2020, shall only be covered under the provision of this section.
iv. Amend clause (35) of section 10 to provide that the provisions of this clause shall not apply to any income, in respect of units, received on or after 1st April 2020.
v. Amend clause (23FC) of section 10 so that all dividends received or receivable by business trust from a special purpose vehicle is exempt income under this clause.
vi. Amend clause (23FD) of section 10 to exclude dividend income received by a unit holder from business trust from the exemption so that the dividend income is taxable in the hand of unit holder of the business trust.
vii. Amend sub-section (3) of section 115UA, thus dividend income distributed by a special purpose vehicle to business trust would be taxed in the hands of unit holder.
viii. Remove reference of section 115-O dividend income in various sections like section 57, section 115A, section 115AC, section 115ACA, section 115AD and section 115C
ix. Remove the opening line of clause (23D) of section 10, as mutual fund no longer required to pay additional tax.
x. Insert a new section 80M as it existed before it removal by the Finance Act, 2003 to remove the cascading affect, by providing that company receiving dividend income, shall reduce the total income by dividend distributed, if such dividend is distributed to shareholders prior to the due date of filing of return.
xi. Amend the section 115BBDA, which taxes the dividend income in excess of Rs. 10,00,000/- in the hands of shareholders at 10%., to only dividend declared, distributed or paid by a domestic company on or before the 31st March, 2020.
xii. Amend section 57 to provide that no deduction shall be allowed from dividend income, or income in respect of units of mutual fund or specified company, other than deduction on account of interest expense and in any previous year such deduction shall not exceed twenty per cent of the dividend income or income from units included in the total income for that year without deduction under section 57.
xiii. Amend section 194 to include dividend for tax deduction. At the same time the rates of 10% is prescribed and threshold increased from Rs 2,500/- to Rs 5,000/- for dividend paid from any mode.
xiv. Amend section 194LBA, to provide for tax deduction (TDS) by business trust on dividend income paid to unit holder, at the rate of 10% for resident. For non-resident, it would be 5 % for interest and 10% for dividend.
xv. Insert a new section 194K to provide that any person responsible for paying to a resident any income in respect of units of a Mutual Fund specified under clause (23D) of section 10 or units from the administrator of the specified undertaking or units from the specified company shall at the time of credit of such income, in excess of Rs. 5000/- to the account of the payee or at the time of payment thereof by any mode, deduct income tax (TDS) there on at the rate of 10%.
xvi. Amend section 195 to delete exemption provided to dividend referred to in section 115-O.
xvii. Amend section 196A to revive its applicability on TDS on income in respect of units of a Mutual Fund.
xviii. Amend section 196C to remove exclusion provided to dividend under section 115-O.
xix. Amend section 196D to remove exclusion provided to dividend under section 115-O.
xx. Amend section 115-O to provide that dividend declared, distributed or paid after 1st April 2003, but on or before 31st March 2020 shall be covered under the provision of this section.
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