Recipient pay tax on Dividend Income, Govt Abolition of DDT

The Ongoing Controversy On Erroneous Applicability Of Dividend Distribution  Tax Finally Ends

During the past quarters, the provisions of law regarding buy-back of shares since introduction of dividend distribution tax (‘DDT’) under section 115Q of the Act w.e.f. 01.04.2003 till 31.05.2013 are being interpreted in a conflicting manner by the tax authorities and taxpayers, thereby giving rise to disputes on this issue.

It has been contended that subsequent to introduction of section 115QA in the Act , the income-tax authorities, in some cases have sought to re-characterize the purchase consideration received on account of buy-back of shares, undertaken prior to 01.06.2013, as dividend and accordingly, subjecting the amounts so distributed by the companies to DDT. This has lead to un-ended litigation and undue harassment to the tax payers.

In a welcome move, the CBDT has come up with a clarification so far as income arising to the shareholder on but back of shares between the period 01.04.2000 till 31.05.2013 would be taxed as capital gains in the hands of the recipient.

In accordance with section 46A of the Act and no such amount shall be treated as dividend in view of provisions of section 2(22)(iv). The ongoing controversy is enclosed herewith along with the latest CBDT Circular No. 03/2016 dt. 26th Feb 2016.

New Update on FY 2020-21

Recipient pay tax on Dividend Income, Govt Abolition of DDT

Govt Abolition of DDT (i.e. Dividend Distribution Tax) & introduction of dividends taxation in the hands of the recipient

• As a result, an Indian company that pays dividends is no longer subject to DDT and should instead withhold tax at source at the time of payment because the dividend receiver is now taxed. The withholding tax (‘WHT’) on dividends paid to resident shareholders is 10%, whereas the rate for non-resident shareholders is 20% under Indian domestic tax law (plus applicable surcharge and cess).
• However, under the DTAAs (double taxation avoidance agreements) that India has with other countries, preferential WHT rates are available if the recipient of such dividends meets the eligibility requirements.

Mandatory TDS filling in accordance with new dividend legislation – TDS on dividend income

• Mandatory reporting in accordance with new income tax law on dividend regulations Company must submit TDS returns in India to report dividends paying in India, Normal rate of Withholding tax i.e TDS rate is 10% on dividend income paid in excess of INR 5k from mutual fund or a company.
• After the Abolition of Dividend Distribution Tax will ensure to make Indian-equity markets more encourage & attractive for FDI (foreign investment) in India. But due to COVID-19 pandemic  across the globe, chances of increasing foreign investment at this stage are remote.

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