Finace (No. 2) Act, 2014: Dividend Distribution Tax and Income Distribution Tax The Dividend Distribution Tax (DDT) which is leviable under section 115-O of the Act, is an additional corporate tax in the hands of the company which is declaring the dividends. DDT was implemented in Finance Act, 2003. Until then, India had followed classical taxation system where the income earned by a company and distributed to shareholders suffered two levels of taxation viz., the corporate income tax at the entity level and the dividend received was taxed in the hands of the shareholders as income from other source. To avoid this, DDT was introduced where in addition to the corporate income tax the company was required to pay DDT at the rate of 15% (plus surcharge and cess) and the dividends received were tax exempt in the hands of the shareholder9. While on the face of it appears to be an integrated system i.e. the shareholders are exempt from tax, it is they who economically suffer the DDT as the company will have to back work before declaring dividends factoring the DDT to be paid by it. The DDT was payable on the amount declared as dividend. However, the Finance Bill, 2014 has now grossed up the dividends for paying DDT i.e. DDT should not be paid merely on the dividend actually declared but has to be paid as per the formula herein: The amount of dividend actually declared X 0.15 + The amount of dividend actually declared In other words, whatever the number that results by applying the formula without the addition of the amount of dividend actually declared, will be the tax liability of the company as DDT. Same is the case for income distribution by a Mutual Fund to its unit holders under section 115R. The above change in law is applicable from October 1, 2014 i.e. any dividend distributed by a company or income distributed by a Mutual Fund on or after October 1, 2014 will have to be grossed up as mentioned above for paying DDT or IDT as the case may be.
Posted on: Sat, 06 Dec 2014 09:15:07 +0000
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