Tax on Dividend

Article by Manish Agarwal, CEO Tax Aachary

According to the Indian Income Tax Act, domestic companies declaring dividend out of its residual profits are required to pay dividend distribution tax (DDT) under section 115 O of the Income-tax act. The shareholder will receive their share of profit after the payment of DDT and same is tax-exempted in the hands of investors under section 10(34) of the Income-tax act.  From last two years shareholders who are receiving dividend more than Ten Lakhs are now require to pay tax @ Ten percent on the dividend income earned over and above Rs. Ten Lakhs.  Not only this, there are different ranges of surcharge on tax for different slabs

 

The foreign companies who were having subsidiaries in India are also required to pay DDT when they repatriate the profits earned from India and require to pay tax in their home country. There is no foreign tax credit available to the DDT paid in India and hence repartition of profit from India will always considered as an exorbitant model as they are paying taxes on the same income in two different countries, which ultimately deterrent foreign investment in India.

 

As per Indian Budget 2020 announced by Finance minister on February 1, 2020, the Dividend Income is no more exempt under section 10(34) and also DDT under section 115 O has been abrogate. Hence April 2020 onwards, Companies declaring dividends shall not be  required to pay DDT while making dividend payment to shareholders and shareholders are now entail to pay tax on their dividend Income based on their tax slab.

 

From the above proclamation, the foreign companies unequivocally gets advantage as the maximum tax payable in India comes to 20% on dividend income. With the former advantage, they will get the FTC of the taxes to withhold in India.  However, the domestic investors or shareholders are in confused situation as they are not able to make out whether taxing dividend income and abolishing DDT benefits them or not.  In this regard, in the below table, we have tabulated the scenarios of various income group as their tax rates are different.  In the below table, we have considered profit after tax of 1000 units and DDT on the same comes to 203.60.

 

 

 

WITH DDT

DIVIDEND TAX

 

Tax Rate of Domestic Individuals

 Tax Rate

Tax on dividend

Total DDT and tax paid

 

Effective Tax rate on dividend

Tax on dividend paid

Effective Tax rate on dividend

Tax Saving/

(Loss)

Income less than 10 Lakhs

20.80%

                    -  

       205.55

 

20.56%

     208.00

20.80%

-0.24%

Income less than 50 Lakhs & dividend Income less than 10 Lakhs

31.20%

                    -  

       205.55

 

20.56%

     312.00

31.20%

-10.64%

Income less than 50 Lakhs & Dividend earned more than 10 Lakhs

31.20%

             81.58

       287.14

 

28.71%

     312.00

31.20%

-2.49%

Income between 50 Lakhs to 100 Lakhs

34.32%

             89.74

       295.29

 

29.53%

     343.20

34.32%

-4.79%

Income between 100 Lakhs to 200 Lakhs

35.88%

             93.82

       299.37

 

29.94%

     358.80

35.88%

-5.94%

Income between 200 Lakhs to 500 Lakhs

39.00%

           101.98

       307.53

 

30.75%

     390.00

39.00%

-8.25%

Income above 500 Lakhs

42.74%

           111.77

       317.32

 

31.73%

     427.44

42.74%

-11.01%

 

 

Tax Rate of Domestic Companies & Others

 

 

 

 

 

 

 

 

Turnover less than 400 Crores.

29.12%

                    -  

       205.55

 

20.56%

     291.20

29.12%

-8.56%

Turnover more than 400 Crores.

34.94%

                    -  

       205.55

 

20.56%

     349.44

34.94%

-14.39%

Section 115BAA

25.17%

                    -  

       205.55

 

20.56%

     251.68

25.17%

-4.61%

Tax Rate of Foreign Investor

20.00%

                    -  

       205.55

 

20.56%

     200.00

20.00%

0.56%

 

From the analysis of the above table, the following can be concluded.

 

  1. Domestic companies and Individuals are going to pay more tax on  their dividend Income.
  2. Foreign investors  gets benefit as they able to take credit of taxes withhold in India.

 

Hence, the decision of removing DDT and taxing dividend Income going to have negative impact on domestic investment.  

 

Also, there is a need to deduct TDS under section 194 or 194 K @ Ten percent on domestic dividend payouts more than Rs. 5000 per annum.  In case, shareholders who do not provide PAN, are eligible for TDS deduction @ Twenty percent.   In case of dividend payment to foreign shareholders, the TDS deduction will be done under section 195 and the applicable tax rate on dividend payout to non-residents under section 115A is Twenty percent. However, the benefit of DTAA is available if the foreign shareholder provides the tax residency certificate or Indian PAN.  Following are the few beneficial tax rates available in the DTAA in respect of dividend income.

(i)                 Mauritius                                    –Five percent

(ii)               Singapore                                    –Ten percent

(iii)             United Kingdom                          –Ten percent

(iv)             Unites States of America             – Fifteen percent

 

Further, the non-resident shareholder are not required to file any tax return in India in respect of their dividend income after deduction of TDS under section 195 and they will get the FTC in their home country for the taxes withheld in India.

 

With the above-mentioned change in law, the business model of a limited company is now better than other models like LLP. Same can be understood from the below table.

 

Parameter

Company

Branch of foreign Co

LLP

Headline tax on profit

25.17%

43.68%

34.94%

Tax on repartition of Profit

5% to 21.84%

Not Taxable

Not Taxable

Effective Tax Rate

28.91% to 36.39%

43.68%

34.94%

Tax on Exit

10.92%

Not Applicable

21.84%.

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