Sujit Bangar

Taxation Of Dividends After Budget 2020-21

In her Budget for 2020-21, the Finance Minister has abolished Dividend Distribution Tax (DDT) and shifted the burden of tax on dividends in the hands of recipients of dividend income. The company pays dividends from the accumulated profits in the reserves in its balance sheet and such profit is accumulating from the income on which tax has already been paid by the company as Corporation Tax (CT). The rates of CT are substantially reduced by the Government through the Taxation Laws Amendment Act 2019. The recent move to abolish the DDT is keeping in line with the reduction of rates of Corporate Tax.

What Is Dividend Distribution Tax (DDT)?

India is the only country in which DDT is levied. Prior to F Y 1997-98 dividend was taxed in the hands of shareholder recipients of dividend income (referred to as a classical system in Budget documents). The DDT at the rate of 10% was brought into law from 1997-98. The rate was increased to 15% FROM 2007-08. Subsequently from 2014-15, the effective rate of DDT shot up to 20.6% (including surcharge and cess). This has now been abolished and the incidence stands shifted to the hands of shareholder recipients. The movement to shift the burden started with the Finance Act 2016 when the dividend income exceeding Rs.10 lacs was taxed at the rate of 10% in the hands of resident non-corporate shareholders. For this, the Finance Act, 2016 introduced section 115BBDA in the Income Tax Act.
As per the existing scheme, the domestic company is required to pay tax on the dividend declared, distributed and paid to its shareholders at the rate of 15% which goes to 20.6% after including surcharge and applicable cess. This DDT is charged as per section 115O of the Income Tax Act.

What is proposed in the Budget 2020-21?

The budget does not do away with tax on the dividends but it has shifted the burden of paying tax from the distributor of dividends to receiver of dividends. Thus the tax incidence has shifted. These are the major changes, besides consequential changes in various other provisions of the Income Tax Act, proposed in the Budget 2020-21.

  • The companies would not be required to pay DDT on the dividend declared after April 1, 2020, and the dividend shall be taxed in the hands of the investor shareholders only at the applicable rate.
  • The provisions of section 115BBDA of the Act would not be applicable to dividend declared after April 1, 2020.
  • Against dividend income, an expenditure deduction can be claimed under section 57 of the Act on account of interest expense, capped but such claim cannot be more than 20% of the dividend income.
  • The domestic companies/mutual funds would be required to deduct tax at the rate of 10% under section 194/194K of the Act in respect of such dividend income exceeding Rs. 5000. Mutual funds would be doing TDS only on dividend. There won’t be any TDS from mutual funds on capital gain.
  • Set-off will be allowed for dividend distributed by the domestic company one month prior to the due date of filing of return.
  • Section 80M of the Act will be brought back into the statute to remove the cascading effect, with a change that set-off will be allowed only for dividends distributed by the company one month prior to the due date of filing of return, in place of the due date of filing return earlier.

The changes proposed are effective for the dividends declared after April 1, 2020, and are effective for ITRs of Assessment Year 2021-22. However, the provisions related to TDS from dividend income shall be effective from 01.04.2020.