While the government has removed DDT, the overall impact thereof for various classes of investors and assets would be considerably different.
Up till now, companies in India were subjected to income tax on the profits earned during the relevant year. Further, companies were also required to pay Dividend Distribution Tax more popularly referred to as DDT, on the profits distributed to shareholders. Those other than corporate shareholders were required to pay an additional tax on receipt of dividend at the rate of 10 percent plus an applicable surcharge for dividends received, in excess of Rs 10 lakh.
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Mutual funds were also required to pay DDT on the dividend distributed by them to unitholders. However, the unitholders were not subject to income tax on such dividend.
Special Purpose Vehicles engaged in the infrastructure sector (SPV) and held by a Business Trust (INVIT) were specifically exempted from DDT. The Business Trust and unitholders were also exempted from income tax on dividend received from the SPV.
There were good arguments for and against DDT. While it was convenient to administer and collect DDT, it had several drawbacks:
Considering that the negatives far outweighed the positives it was considered expedient to eliminate DDT. Over the years, recommendations were made to the finance ministry to consider eliminating DDT. With the Finance Bill 2020, the finance minister has accordingly proposed the elimination of DDT.
The amendment proposed by Finance Bill 2020
Dividend distributed by companies / mutual funds
Dividend distributed by a business Trust
Expenses incurred to earn dividend
The impact of the amendment
On dividend distributed by the company
To understand the impact on dividend distributed by a company, let us look at a few simple scenarios tabulated below. We assume that in all the scenarios, the company distributing dividend opts for a corporate tax rate of 25.17 percent. Therefore, assuming that the company earns Rs 100, post payment of corporate tax of Rs 25.17 there would have been a distributable surplus of Rs 74.83. Let us evaluate the following three scenarios in this background:
Scenario 1: A shareholder who is a tax resident of Singapore to whom the tax treaty between India and Singapore would apply.
Scenario 2: A resident individual shareholder or private Trust who has income exceeding Rs 5 crore.
Scenario 3: A resident company shareholder.
|Particulars||Non-resident shareholder||Resident individual shareholder or private trust||Resident company shareholder|
|Profit after tax (entirely distributed to the shareholder)||74.83||74.83||74.83|
|Tax on dividend payable by the shareholder||7.48||31.98||18.83|
|Shareholder’s income (net of tax) (A)||67.35||42.85||56|
|Total income-tax (100 – A)||32.65||57.15||44|
It is worthwhile to note the below considerations as well to understand the impact on dividend distributed by companies:
On dividend distributed by a mutual fund
The dividend would be taxed in the hands of unitholders at tax rates applicable to them.
On dividend distributed by a business Trust
The amendment withdraws the exemption available to the unitholders of a business Trust on dividend received from an SPV and makes it taxable at the normal income-tax rates applicable to the unitholders.
While the government has removed DDT, the overall impact thereof for various classes of investors and assets would be considerably different. It would be necessary for investors to evaluate the exact impact the proposed amendment would have on different classes of assets owned by them.
Shripal Lakdawala is Partner and Chintan Shah is Senior Manager at Deloitte Haskins & Sells LLP. The views are personal.
First Published: Feb 7, 2020 6:00 AM IST