In addition to income tax chargeable in respect of the total income of a domestic company, any declaration, distribution or payment by way of dividends shall be subject to additional Income-tax at the rate around 20.56% including surcharge and cess. The taxes so paid by the company (called Dividend Distribution Tax – DDT) is treated as final payment of tax in respect of the amount declared, distributed or paid by way of dividend. Such Dividend was earlier exempt in the hands of Shareholders. The similar provision was applicable for mutual funds.
The Incidence of tax is thus on the payer company and not on the recipient, where it should normally be. DDT also has a cascading effect of taxes. It will now be subject to double taxation in the form of corporate tax and DD.
Budget 2020: Dividend Distribution Tax
In view of the above, Finance Minister while presenting Finance Bill, 2020, proposed to abolish the Dividend Distribution Tax (DDT) levied on dividends distributed by companies. With the proposed amendment, India will again move to the classical system of taxing dividend income. It will again be taxed in the hands of shareholders / unit-holders.
This proposal would boost market sentiment and allow companies to invest more in the economy. The move will also make the Indian equities more attractive to foreign investors. Besides, it will also increase Foreign Direct Investment (FDI).
Also in the earlier tax rate reform regime, no credit was available to most of the foreign investors in their home country. This was resulting in the lower return of income on equity. Earlier, tax payment on Dividend was sunk cost for the Inventors. Now with these amendments, the paying company shall deduct withholding taxes. It shall deduct 10% tax in case of dividend payment to a non-resident and 5% in the case of residents. Individuals can claim a tax credit for the amount of withholding taxes in their home country.
The proposal is valid for the dividend declaration after 1st April 2020
Impact of Proposal
The Following would be the impact of this proposal:
- Dividends distributed by a domestic company weren’t included in the total taxable income of an assessee prior to these amendments. Now, dividends will form part of the taxable income of an assessee under the head “income from other sources”.
- Income distributed by a mutual fund registered with Securities and Exchange Board of India or a specified company after April 1 will be taxable in the hands of the assessee.
- An Indian company declaring dividends must deduct income tax. Tax deduction should be at the rate of 5/10 per cent if the amount distributed exceeds Rs 5,000.
On the compliance part, residents and non-residents will have to comply with new withholding tax compliances on payment of Dividend. Non-residents need to file their tax returns in respect of Dividend Income earned in India along with other Income.
The above-mentioned tax rate reforms aim to boost FDI in India and promote economic growth in the country.
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