Background
This Article explains the provisions relating to dividends received by the shareholders. However, in budget 2020, The finance minister has removed the levy of Dividend distribution tax (DDT) and consequential amendments have been made to the provisions relating to taxability of dividend in the hands of shareholders. A summary of provisions relating to dividend pre and post amendment will be provided in this article.
- Pre amendment Provisions relating to Taxability of dividend received from domestic companies in the hands of shareholders?
Prior to budget 2020, the domestic companies were liable to pay DDT at 15% (plus applicable surcharge and cess) of the aggregate dividend declared, distributed or paid. The effective DDT rate after considering surcharge and education cess was at 20.56%.
The same dividend shall be exempted in the hands of shareholders since the company has already paid the DDT. However, if the shareholder receives the dividend income from domestic companies which in excess of Rs.10 lakhs during the year, the same shall be taxable at the rate of 10% (plus applicable surcharge and cess) in excess of Rs.10 lakhs.
However, in most cases involving foreign investors, credit for DDT was not available in their home countries, which ultimately resulted in a reduction of rate of return on equity capital.
- What is an amendment made in budget 2020 with respect to dividend?
In the budget 2020, the finance minister has removed the levy of DDT. Hence, from the FY 2020-21 onwards, the dividend shall be taxable in the hands of shareholders since the company distributing the dividend is not required to pay any Dividend distribution tax (DDT).
- How will the amendment impact the Resident Shareholder?
By removal of DDT, the shareholders who receive the dividend are not eligible to take exemption.
If the shareholder is an individual – The dividend shall be taxable as per the applicable slab rates. Apart from that, the company who is paying the dividend shall deduct the TDS if the dividend amount exceeds Rs.5000 in a year.
If the shareholder is a Company – The dividend shall be taxable as per the effective tax rates, which would range from 25.17% to 34.94%.
- How will the amendment impact Non-Resident Shareholders?
Indian companies shall be liable to withhold (deduct) taxes at 20% on payment of dividend to a non-resident shareholder. This rate could be lower if the benefit under the tax treaty is available to such shareholders. Tax treaties with Singapore, Mauritius, Netherlands, Australia, United Kingdom and USA provide for a lower withholding tax rate of 5% to 15%. Hence, nonresident shareholders can claim benefit of lower tax rates under respective treaties.
Now, the foreign shareholders/ investors will also get credit for such withholding tax against tax payable in their home country. The amendment in the Finance Act, 2020 will boost the sentiment of foreign investors.
- Whether any expenses will be adjusted against dividend income?
Yes, Interest expenses on borrowed capital for the purpose of acquisition of securities against dividend income up to 20% of dividend income.
- Summary of taxability of dividend in the hands of shareholders pre and post amendment?
