Abolition of Dividend Distribution Tax

Abolition of Dividend Distribution Tax




  • The abolition of the Dividend Distribution Tax (DDT) in Budget 2020 is hailed as a big relief for corporates and nonresident shareholders.

  •  The dividend is a return given by a company to its shareholders out of the profits earned by the company in a particular year.

  •  Dividend constitutes income in the hands of the shareholders which ideally should be subject to income tax.

  •  However, the Indian income tax laws provide for an exemption of the dividend income received from Indian companies by the investors.

  • DDT is levied on any domestic company which is declaring/distributing dividends and is paid at the rate on the gross amount of dividend.

Current regulations –

  • Section 14A provides that any expense concerning income not forming part of total income would not be allowed as a deduction.

  • Presently, the dividend income is not taxable in the hands of shareholders and does not form part of total income.

  •  Section 56 charges income tax on the dividend.

  • Section 57 allows certain deductions while computing income from other sources.

  • All expenses incurred wholly and exclusively to earn income tax under Section 56 are allowed as a deduction.

Present Taxation Structure –

 Income may be interpreted in a wide manner to include receipts, windfalls, and gifts.  When the income like profit is taxed, the mechanism provided to tax it would allow for a deduction of expenses. Certain incomes like royalty, fees for technical service, etc, are subject to taxation on a gross basis. In the case of income from house property, there is a cap on deduction towards interest paid on borrowed capital. The rationale is that the annual lettable value of a self-occupied property is deemed as nil. Where the assessee claims that dividend as business income, it may be possible to claim all expenses regarding it. However, the debate of whether dividends can ever constitute business income is already before the courts.

Budget proposal – 

  • There will be no disputes regarding disallowance of expenses in terms of Section 14A of Income Tax (I-T) Act read with Rule 8D of I-T Rules.

  • It proposes a proviso to Section 57 that states that no deduction shall be allowed against dividend income other than interest expenses.

  • The deduction on account of interest will be restricted to 20% of the dividend income. The cap of 20% is based on the amount of income earned and offered to tax in the previous year.

  • Hence, in case, no dividend income is earned in a year even though the assessee incurs interest expenditure or fee on investment managers, she cannot claim any deduction.

  •  Besides restricting the quantum of deduction in respect of interest, the amendments change the regime of taxation from being net to gross.

  •  The intention cannot be to discourage investors from borrowing heavily to invest in shares or paint all dividends earned as a windfall, nor can there be a fear of an excessive claim of expenses.

  •  Presently, expenses are allowed to be deducted as per Section 57, and it is nobody‘s case that it has resulted in a massive leakage of revenue.

Impact – 

The abolition of DDT and reintroduction of tax on dividends in the hands of the shareholder has brought relief to non-resident investors. However, this change is likely to increase the pain of resident shareholders, especially those falling in higher tax brackets

Download Plutus IAS Daily Current Affairs of 22nd July 2021

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