OVERVIEW ON TAXATION OF DIVIDEND

TAXATION OF DIVIDEND W.E.F FY 2020-21

Up till Assessment Year 2020-21, shareholders were not taxed in respect of the dividend received by them from an Indian Company, up to an amount of Rs 10 lacs, and the respective company paying dividend shall pay the tax in the form of Dividend Distribution Tax to the government under section 115-O.

However, after 1^st April 2021, the domestic companies are not liable for payment of DDT and, thus, the amount of dividend received by the shareholder will be taxed in the hands of the respective shareholder. Now, since the dividend will be taxable in the hands of the shareholder, various provisions have to be revived in order to provide for allowance of expenses on dividend income, the rate of tax on dividend income, and also the treatment of inter-corporate dividend.

DIVIDEND UNDER INCOME TAX ACT, 1961

As per Section 2(22) of the Income-tax Act, the dividend includes the following –

• Distribution of the accumulated profits to the shareholders.
• Distribution of debentures or deposit certificates to shareholders, made out of the profits of the company and also include issue of bonus shares to preference shareholders out of said profits.
• Amount distributed to the shareholders at the time of liquidation of the commonly.
• Distribution to shareholders out of accumulated profits under the scheme of reduction in share capital.
• Loan or advance by a closely held company to its shareholder out of the amount of accumulated profits held by such company.

OBLIGATION OF THE DOMESTIC COMPANIES

1. The domestic companies are not required to DDT on dividend distributed to shareholders after 1^st April 2021. However, they shall continue to be liable to deduct tax on the said amount under Section 194.
2. As per the Section 194, where any dividend is paid by a domestic company, on and after 1^st April 2021, the same shall deduct TDS @ 10% on the amount of dividend distributed to the resident shareholders, provided the aggregate amount of dividend to be distributed or paid during a financial year exceeds Rs. 5,000. However, the said provisions shall not apply to dividend paid to Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC) or any other insurer holding shares in their own name, or as beneficial owners.

TAXATION IN THE HANDS OF SHAREHOLDERS

• The Section 10(34), providing for exemption of taxation of dividend in the hands of shareholders, stands withdrawn from Assessment Year 2021-20 onwards. Thus, the shareholders will now be liable to pay tax on the whole amount of dividend received during a financial year, without any exemption.
• The rate of tax and the taxability provisions on dividend, will depend upon residential status of the shareholders, and the head of income.

TAXATION OF RESIDENT SHAREHOLDER

• A shareholder can be a trader or investor. Thus, where the income is earned from the trading activities, the same be taxable under the head of business income. However, the shareholder is an investor, the amount of dividend be taxed under the head of income from other sources.
• In case, dividend income is taxed under PGBP, the rate of tax will be that applicable on the other business income. The computation of the said income, be made on either mercantile system of accounting or cash basis of accounting.

DEDUCTIONS

• Where dividend is assessed as business income, the taxpayer can claim the deductions in respect of all the expenditures incurred in relation to earn such dividend income.
• However, where the said amount is assessed under income from other sources, the taxpayer can claim deduction in respect of interest expenditure incurred for earning the dividend income, and the same be allowed to a maximum of 20% of total dividend income. Also, no deduction be allowed in respect of commission or remuneration paid to a banker or any other person for realization of such dividend.

TAX RATE

• The dividend income be taxed at the normal tax rates applicable on the respective assessee, however, in case of resident individual, being an employee of an Indian company or its subsidiary, engaged in Information technology, entertainment, pharmaceutical or bio-technology industry, and receiving dividend in respect of GDRs under a scheme of Employees’ Stock Option Scheme, shall be taxable at concessional tax rate of 10% without allowing any deduction.

TAXATION OF NON-RESIDENT SHAREHOLDERS

• It is provided, that a non-resident can invest in Indian market, either directly as private equity investors or as Foreign Portfolio Investors (FPIs). It is generally seen, that non-resident person holds shares of an Indian company as an investment, thus, the amount of dividend be taxable under the head of income from other sources.

TAX RATE

• The dividend income received by a non-resident shareholder (including FPIs and NRIs), be taxed @ 20% without allowing any deductions. However, in case of dividend income received from investment in an offshore banking unit, the same be taxed @ 10%.
• Further, where the dividend is received in respect of GDRs issued by an Indian Company or Public Sector Company (PSU) and the same is denominated in foreign currency, the same be taxed @ 10% without allowing any deductions.

SECTION	TYPE OF ASSESSEE	PARTICULARS	TAX RATE
SECTION 115AC	NON-RESIDENT INDIVIDUAL	DIVIDEND ON GDRS ISSUED BY AN INDIAN COMPANY OR PUBLIC SECTOR COMPANY (PSU), PURCHASED IN FOREIGN CURRENCY	10%
SECTION 115AD	FPI	DIVIDEND INCOME FROM SECURITIES HELD BY FPI	20%
	INVESTMENT IN DIVISION OF AN OFFSHORE BANKING UNIT	DIVIDEND INCOME FROM THESE INVESTMENTS	10%
SECTION 115E	NON-RESIDENT INDIAN	DIVIDEND INCOME FROM SHARES OF AN INDIAN COMPANY PURCHASED IN FOREIGN CURRENCY.	20%
SECTION 115A	NON-RESIDENT OR FOREIGN CO.	DIVIDEND INCOME IN ANY OTHER CASE	20%

 

TDS ON DIVIDEND INCOME

• As discussed above, dividend income to a non-resident shareholder, is charged to TDS deduction under section 195 of the Income-tax Act. However, where the dividend is distributed or paid in relation to GDRs issued by an Indian Company or Public Sector Company (PSU) and the same is purchased in foreign currency or to Foreign Portfolio Investors (FPIs), TDS be deducted under section 196C and section 196D, respectively.

GOVERNING SECTION	SECTION FOR TDS DEDUCTION	PARTICULARS	RATE OF TDS, IN CASE OF OTHER NON- RESIDENT	RATE OF TDS, IN CASE OF FOREIGN COMPANY
SECTION 115AC	SECTION 196C	DIVIDEND ON GDRS ISSUED AN INDIAN COMPANY OR (PSU), PURCHASED IN FOREIGN CURRENCY	10%	10%
SECTION 115AD	SECTION 196D	DIVIDEND INCOME FROM INVESTMENT IN DIVISION OF AN OFFSHORE BANKING UNIT	20% 10%	20% 10%
SECTION 115E	SECTION 195	DIVIDEND INCOME FROM SHARES HELD IN INDIAN COMPANY PURCHASED IN FOREIGN CURRENCY.	20%*	–
SECTION 115A	SECTION 195	DIVIDEND INCOME TO A NON-RESIDENT UNDER ANY OTHER CASE	30%*	40%*

 

*Where the rate of TDS as per DTAA is lower than the rate prescribed under the Finance Act, then tax be deducted at the rate determined under DTAA.

TAXABILITY UNDER DTAA

• DTAA is the most important aspect for NRIs. Taxation aspect is of utmost important, where the assessee is receiving income from more than one country. Generally, in case of NRI, earning income in India as well as abroad, are required to pay the income tax in India and abroad both at the same time, since different countries have different tax regulations. Such scenario creates the problem of double taxation for NRIs.
• The Double Tax Avoidance Agreement is an agreement, signed by the two countries to enter into a treaty. This agreement is undertaken by the countries to provide benefit to NRIs to get relief from paying taxes multiple times. DTAA does not imply that the NRI will be relieved from tax liability, it’s just that they have to pay the tax in a single country, once. Another important aspect is the rate of tax. There could be different rate for taxing an income in two countries, thus DTAA also reductions of taxes for uniformity and hence helps in reducing the instances of tax evasion
• As per most of the DTAAs, India is already in agreement with various foreign countries, and accordingly, the dividend income be taxed in the hands of the beneficial owner of shares at the rate @ 5% and can be charged up to 15% on the gross amount of the dividends received.

INTER-CORPORATE DIVIDEND

• Now since the taxation aspect of dividend has shifted from companies to shareholders, a new section 80M was introduced by the Government, under the Act, with the aim to remove the cascading effect. However, no provisions have been provided in respect of dividend received by domestic from a foreign company.

PAYMENT OF DIVIDEND BY ONE DOMESTIC COMPANY TO ANOTHER

• Section 80M was introduced, in order to remove the cascading effect, by providing that the amount of inter-corporate dividend received by a domestic company, shall be reduced from total income of company, provided the same is further distributed to their shareholders, one month prior to the due date of filing their annuals return.

Read more for related blogs are ;

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• New TDS deduction No cash transactions exceeding 1 Crore -Section 194N
• Extention of TDS/TCS statement filing Date
• TDS payment to resident contractors

Consequences of not deducting TDS and Non payment or Late payment

PAYMENT OF DIVIDEND BY FOREIGN COMPANY TO DOMESTIC COMPANY

• Where, dividend is received by a domestic company from a foreign company, and such domestic company holds atleast 26% of the shareholding, the said income be taxed @ 15% plus Surcharge and Health and Education Cess. Such rate of tax be applied on the gross amount, without allowing any deduction.
• However, in case the company does not hold 26% of the shareholding, the dividend income be taxed at the normal rate and the company can also claim deduction in respect of all the expense incurred for earning such dividend income.

NON-APPLICATION OF MAT ON DIVIDEND INCOME TO A FOREIGN COMPANY

1. Provisions of MAT applies to a foreign company only where such company is a resident of a country with which India is having a DTAA agreement and such company carries business activity through a PE in India.

However, such company shall not be taxed under the presumptive taxation schemes as provided under Section 44B, Section 44BB, Section 44BBA or Section 44BBB.

• However, the following incomes and expenses, already adjusted, be reversed to the net, where the company’s income is taxable at a rate lower than MAT –
• Capital gain on securities.
• Interest income.
• Royalty income.
• FTS

ADVANCE TAX LIABILITY ON DIVIDEND INCOME

It is provided, that where the shortfall in the advance tax instalment arises on account of dividend income, the said shortfall shall not be subject to interest penalty under section 234C, provided the taxpayer pays the full amount of tax in the subsequent advance tax instalments. However, the said benefit shall not be available in respect of the deemed dividend under Section 2(22)(e).

CONCLUSION

1. The Dividend Distribution Tax has been abolished to be paid by the companies as per Finance Act, 2020, on or after 1 April 2020 and the same be now taxed in the hands of the shareholders.
2. Section 115BBDA of the Income Tax Act, which provides for exemption for tax on dividend income from Indian Companies, up to an amount of Rs. 10 lakhs, shall now stand withdrawn. The entire amount of dividend shall be subject to tax.
3. Under the new provisions, the Indian company paying dividend, shall be liable to deduct TDS under Sections 194 & 195 of the Income Act, 196, provided the amount of dividend to resident shareholders exceed Rs 5000 in a financial year.
4. After the abolishment of DDT, many entrepreneurs are expected to form their business as company instead of setting up of a firm or LLP but provided they can handle the burden of compliances and regulations.

Rate of Income tax for Companies