Impact of Finance Act on Dividend Taxation

Finance Act 2020 Ammendment in Taxation of Dividend by Companies

Income Tax Aspects on Dividend Income  

  1. TAXATION OF DIVIDEND FROM COMPANIES

1.Taxation of Dividend of a Company:

 

Sr. No

Point of Discussion

 

Pre-budget Scenario

 

Scenario as per Finance Act, 2020

 

1

 

Dividend Distribution Tax

 

Domestic        Company  was required     to     pay  Dividend Distribution Tax (DDT) on an amount declared, distributed or paid way of dividends. The company was required to pay DDT @ 17.05%.

 

Domestic Company is not required to pay DDT on an amount declared, distributed or paid by way of dividends.

 

 

2

 

 

Taxation of Dividend

 

The dividend was exempt in the hands of shareholders up to INR 10 Lakhs and the dividend received in excess of INR 10 Lakh was taxable in the hands of shareholders @ 10%

 

The dividend is now taxable in the hands of shareholders at the slab rate applicable to the shareholder irrespective of amount of Dividend received. The limit of INR 10 Lakh has been abolished.

 

 

3

 

 

TDS            on

Dividend paid             to

shareholders

 

No TDS was required to be deducted by company on dividend to shareholders.

TDS is required to be deducted by company on Dividend paid to shareholders in excess of Rs. 5,000/- by any mode other than cash or Rs. 2,500/- in cash mode.

  • Resident Shareholders: TDS @ 10%
  • Non - Resident Shareholders: TDS u/s 195 at rates in force i.e. 20% or as per treaty whichever is beneficial.

4

Expenses

against dividend

No expenses allowable against dividend income

A deduction of interest expenses

is available to the extent of 20% of dividend income.

5

Set     off     of losses

No losses could be set off against Dividend income

Current year Losses can be set off against Dividend Income.

            Impact of Amendment:

  1. Shifting of tax burden from companies to the shareholders.
  2. The shareholders in higher tax brackets will be adversely affected on receipt of dividends.
  3. The companies are required to ensure compliance with TDS provisions at the time of payment of dividend.
  4. In case where the dividend is declared on or before 31st March, 2020 and paid on or after 1st April, 2020, the companies will be liable to pay DDT on such dividend declared or distributed and, the same will continue to remain exempt in the hands of the shareholders.
  5. The said amendment will be effective from 1st April, 2020.

2.The implication of abolition of DDT and taxing dividends in the hands of the shareholders can be understood from the following table:

Pre-budget scenario                                                                        Amount in Rs

 

 

 

 

Sr.

No.

 

 

 

Particulars

Pre-budget Scenario

Shareholders in income group

Low income group (Total income

<50L)

Medium income group (Total income 1 – 2 Cr)

High income group (Total income > 5 Cr)

A

Net profit before tax of Company

100.00

100.00

100.00

B

Tax on above @ 25%

25.00

25.00

25.00

C

Net       income             available    for distribution of dividend

75.00

75.00

75.00

D

DDT @ 17.05%

12.79

12.79

12.79

E

Net     Dividend            distributed to shareholders

62.21

62.21

62.21

F

Tax paid by shareholder on said Dividend (Refer note 3)

-

7.44

8.86

G

Net income after tax

62.21

54.77

53.35

H

Effective rate of Tax

37.79%

45.23%

46.65%

                                                                                                                                                  _

Post Budget Scenario                                                                                                                 Amount in Rs

 

 

 

Sr.

No.

 

 

 

Particulars

Post-budget Scenario

Shareholders in income group

Low income group (Total income

<50L)

Medium income group (Total

income 1 – 2 Cr)

High income group (Total income > 5 Cr)

A

Net profit before tax of Company

100.00

100.00

100.00

B

Tax on above @ 25%

25.00

25.00

25.00

C

Net       income       available             for distribution of dividend

75.00

75.00

75.00

D

DDT

-

-

-

E

Net     Dividend           distributed to shareholders

75.00

75.00

75.00

F

Tax paid by shareholder on said Dividend

23.40

26.91

32.06

G

Net income after tax

51.60

48.09

42.94

H

Effective rate of Tax (F/E)

48.40%

51.91%

57.06%

Notes:

  1. The above scenarios are not exhaustive and select scenarios have been depicted based no certain assumptions (discussed below) for the purpose of understanding.
  2. It is assumed that the shareholder is a Resident Individual. The slab rates applicable are as mentioned below:

Sr.

No.

Income Group

Income Range

Rate of Tax

1

Low

Up to INR 50L

30% + 4% Cess

2

Medium

Between INR 1 -2 Cr

30% + 15%Sur + 4%Cess

3

High

Above Rs. 5Cr

30% + 37%Sur + 4%Cess

      3. It is assumed that the Dividend income in case of Low - income Group does not exceed INR 10L.

      4. The rate of tax for company is assumed to be 25%.

3.Section 80M: Deduction in respect of certain inter-corporate dividends:

Since dividend is now taxable in the hands of shareholders, there may be cascading effect of tax in cases where a company is a shareholder in other companies.In order to remove the cascading effect, a company receiving dividend can claim deduction under Sec 80M of dividend received subject to the distribution of the same on or before the due date as mentioned above u/s 80M.

Section 80M is explained as under:

Domestic company will get the deduction of dividend distributed subject to the following:

  1. The Dividend is received from:
    1. Any other domestic company
    2. A foreign company
    3. A business Trust
  2. Domestic company distributes dividend to its shareholders on or before the due date.
  3. The deduction under Sec 80M, shall be available equal to the amount of dividend received as discussed in point No (a) as does not exceed the amount of dividend distributed as discussed in point No (b)

                      Meaning of “Due date” u/s 80M:

                     “Due date” means the date one month prior to the date of furnishing the return of income u/s 139(1)

Notes:

  1. Mere declaration of dividend by recipient domestic company will not suffice the requirement to claim the deduction u/s 80M. Distribution of dividend is mandatory to claim the deduction u/s 80M.
  2. The said amendment is effective from 1st April, 2020.

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