Budget 2020 expectations for DDT
Double taxation in respect to dividends refers to the fact that dividends are taxed twice.
What are dividends?
Dividends are the profits which are distributed to the shareholders of the company. The shareholder, being the owners of the company, are entitled to the profits of the company. The company, therefore, distributes a certain portion of the profits earned by it to its shareholders, which are termed as dividends. It is not mandatory for the company under any law to distribute dividends to its shareholders, hence, it is at the full discretion of the company to distribute dividends.
What is dividend distribution tax?
The Dividend Distribution Tax is a tax levied on dividends that a company pays to its shareholders out of its profits. The Dividend Distribution Tax, or DDT, is taxable at source, and is deducted at the time of the company distributing dividends, as provided under section 115-O of the Income Tax Act. The dividend is the part of profits that the company shares with its shareholders. The law provides for the Dividend Distribution Tax to be levied at the hands of the company, and not at the hands of the receiving shareholder. However, an additional tax is imposed on the shareholder, who receives over ₹10 lakh in dividend income in a financial year.
How are dividends taxed twice?
Dividends as referred above are the profits which have been earned by the company. These are part of the net business income on which the income tax has been already paid. This means that first the net profits are arrived at by the company and then tax is levied on the profits. After deducting tax from the net profit, the dividend is distributed by the company from the profits remaining with the company after payment of tax. Dividends are then subject to DDT (as discussed under section 115-O of the Income Tax Act. It has been argued that the dividends are the victim of double taxation. Let us know how:-
The dividend distribution tax is doubly-taxed in the following manner:-
• Firstly, the profits earned by the company are subject to income tax at the rate(s) applicable to them.
• The same profits (on which the tax has been levied) when distributed to the shareholders are subject to DDT, on the gross amount of dividend.
What is the procedure for taxation of dividends?
As per section 10(34) of the Income Tax Act, any dividend received by a shareholder from a domestic company is exempt in the hands of the shareholder. Hence, the company has to pay dividend distribution tax on the same. However, this section is subject to section 115BBDA.
As per section 115BBDA, where dividend is received from a domestic company by a specified resident assessee and the amount of dividend exceeds ₹10 lakhs in aggregate, then the receiver is required to pay tax at the rate of 10% on the amount of dividend in excess of ₹10 lakhs. This means that the dividend received up to ₹10 lakhs would be exempt under section 10(34) and the remaining dividend in excess of ₹10 lakhs would be taxable under section 115BBDA.
It is noteworthy that the dividend has already been taxed as business income of the company. Also, the profits of a company are supposed to be the income of shareholders. This way they as part owners i.e. the shareholders have already been taxed.
Hence, the argument extended by most of the corporate houses is that, dividend distribution tax leads to double taxation.
What are the expectations from the budget 2020 in regard to dividends?
This may not seem like a big deal to some people who don’t really earn substantial amounts of dividend income, but it does bother those whose dividend earnings are larger. The double taxation also poses a dilemma to CEOs of companies when deciding whether to reinvest the company’s earnings internally. Because the government takes two bites out of the money paid as dividends, it may seem more logical for the company to reinvest the money into projects that may instead give shareholders earnings in capital gains. Hence, proper amendments in the law relating to DDT is the most expected change from the budget 2020.