Dividend Distribution Tax – Withdrawal & Impact

Dividend Distribution Tax (DDT) refers to the income tax paid by a company on the dividends distributed to members. In the Union Budget presented on 1^st February 2020, the Finance Minister announced that with effect from 01.04.2020, DDT would not be applicable. Hence, tax on dividends would be paid by the individual investors. Thus, the Government has shifted the burden of dividend-taxation from companies to individuals. In this article, we explain the difference between the old and new mechanisms of taxing dividends. Also, the article discusses the advantages of withdrawing DDT for companies and individuals.

Existing Mechanism (DDT is Paid by the Company)

Applicability

DDT is a levy of tax which is applicable in addition to the regular income tax. All Indian companies are required to pay DDT. The liability to pay DDT does not extend to a foreign company. The applicability of DDT will hold good whether the dividend amount is declared, distributed, or paid. DDT applies to both interim and final dividends. The liability for DDT should be met whether DDT is paid out of current profit or accumulated profit. The liability for DDT can be avoided in case the assessee is a Special Economic Zone (SEZ), Pension Trust, or International Financial Services Centre (IFSC).

Rate

The rate of DDT will be 20.5%. The percentage is calculated on the dividend amount. However, in the specified instances, the applicable rate will be 35%. The specified instances are the following:

The payment should be made exclusively by companies. The company should not be a company in which the public are substantially interested.
The company should make a payment to a shareholder as a loan or advance. The payment will be considered for inclusion, even if the amount paid does not represent any part of the assets of the company.
The shareholder should be the beneficial owner of the shares held.
The shares held by the shareholder should not be entitled to a fixed rate of dividend.
The shareholder should hold more than ten per cent of the voting power.
The payment may be made directly to the shareholder. Alternatively, the payment can also be made to a business enterprise in which the shareholder is a member or partner. However, the member of the company who is understood to be the indirect recipient of the dividend should have a substantial interest in the enterprise.
The payment should be made by the company for the individual benefit of the concerned shareholder.

Proposed Mechanism (DDT will be Paid by the Individual)

Applicability

With effect from 01.04.2020, dividends and income from mutual funds are taxable for individuals. However, tax needs to be paid exclusively if the income of the assessee has crossed the basic exemption limit of Rs. 2.5 lakhs.

Rate

The applicable rate is the same as for the regular income earned by the assessee. The rates of taxes are reproduced below for reference:

Taxable Income in Rs.	Tax Rate
0–2.5 lakh	Nil
2.5–5 lakh	5%
5–7.5 lakh	10%
7.5–10 lakh	15%
10–12.5 lakh	20%
12.5–15 lakh	25%
More than 15 lakh	30%

The rates mentioned above apply to an assessee who does not have any deductions under Chapter VI-A of the Act.

Advantages of the Change

Advantages for Corporates

With effect from 01.04.2020, there is no need to pay dividend distribution tax at the time of providing dividends. Hence, companies are saved from financial and compliance burdens. Under the old mechanism, investors who were non-residents as per the Income Tax Act were prevented from claiming credit for the DDT paid in their respective countries. Hence, the dividend paid to non-residents had to undergo taxation twice. The double taxation occurred as a result of DDT and the direct tax legislation prevalent in the home-countries of the non-residents. The situation led to a cascading effect of taxes. The new mechanism has remedied the situation since the concept of DDT has been eliminated from the statute books with effect from 01.04.2020.

Advantages for Individuals

For individuals, the benefit of the basic exemption limit is available. Hence, for an income of up to Rs. 2.5 lakh, there is no need to pay any tax. Individuals who are small investors may purchase shares and securities in anticipation of periodic earnings. The availability of the basic exemption limit for income from dividends and mutual funds ensures that the income of small investors is not taxed at an unduly high rate. The budget announced on 01.02.2020 has removed the applicability of Section 115BBDA. The applicability stands removed for individuals and Hindu Undivided Families (HUFs). As per the section, the Government levied income tax on dividend from Indian companies in excess of Rs. 10 lakhs at 10%. The rate was applicable without any basic exemption limit. The 2020 budget has removed the hardship imposed by the section. To know about the concept of Tax Audit Turnover in Income Tax, click here.