All about Dividend Distribution Tax under Income Tax Act, 1961

A dividend is a payment by a corporation to its shareholders from its profits. A dividend distribution tax was a levy imposed on a corporation’s dividend payment to its shareholders. The DDT was repealed by the Finance Act of 2020, reverting to the traditional taxation system, in which dividends are taxed in the hands of the investors. Previously, a domestic firm’s dividend income was exempt in the hands of shareholders under section 10(34) of the Income-tax Act, 1961, whereas the corporation was subject to dividend distribution tax (DDT) under section 115-O. Let’s discuss more details about the Dividend Distribution Tax further in this blog.

What do you mean by the term Dividend?

A dividend is a payment by a corporation to its stockholders. When a company makes a profit or has a surplus, it can distribute a portion of those earnings to shareholders as a dividend. The dividend received by a shareholder is considered as income by the shareholder and may be taxed.

In other words, a dividend is a payment by a firm to its shareholders, either in cash or in kind. Dividends can pay in a variety of ways, including cash, stocks, or other assets. The Board of Directors decides on a company’s dividend, which must approve by the shareholders. Also, a firm is not necessary to pay dividends, though. A dividend is a portion of a company’s profit that it distributes to its shareholders.

What is Dividend Distribution Tax?

The Dividend Distribution Tax (DDT) is a tax levied on dividends paid out of a company’s profits to its shareholders. The Finance Act of 1997 introduced the Dividend Distribution Tax.

The Dividend Distribution Tax is deducted at the time of distribution and is taxable at the source. Section 115-O governs the provisions relating to DDT. DDT is charged at the hands of the enterprise and the shareholder, according to the law. An exception is when a shareholder receives a dividend of more than Rs 10lakh and must pay an extra tax. 

Abolition of DDT for Indian Companies, as amended by Finance Act 2020

If a shareholder receives a dividend from a domestic corporation, the dividend is tax-free in the shareholder’s hands until Assessment Year 2020-21. Companies had to pay a dividend distribution tax in this case. The Finance Act 2020, on the other hand, has made DDT unnecessary for businesses. Investors are now taxed on dividends.

Only if the dividend is distributed on or after January 1, 2020, is the income taxed in the hands of the investors. In this situation, the entire amount will be taxable in the hands of the investors, who will be responsible for paying dividend taxes. DDT will not charge to the businesses.

When do you have to pay the Dividend Distribution Tax?

The tax is due 14 days towards the government after the dividend declaration, distribution, or payment, whichever comes first.

• In the case of non-payment within the specified time frame, interest accrues at a rate of 1% per month (or portion thereof) until the full amount is paid. Separately from the company’s income tax liability, the tax is paid.
• There is no deduction or credit available to the company for paying the DDT under the income tax law.
• In the same way, while calculating income through dividends, a taxpayer does not claim a deduction for any expenditure, allowance, or set-off of loss under the Act.

Who must pay the Dividend Distribution Tax (DDT) and at what rate?

• Section 115-O of the Internal Revenue Code requires a domestic firm to pay a 15% dividend distribution tax on the gross amount of the payout.
• Tax is payable at 30% on considered dividends under section 2(22) (e). Here in the hands of the shareholder, the dividend is tax-free.
• On the amount of dividends, the effective rate of dividend distribution tax is 17.65%. The applicable tax rate is 15%, according to section 115-O.

Dividend Distribution Tax – Related provisions

On or after April 1, 2020, firms are not obligated to pay DDT on any dividends distributed. A few adjustments to be aware of are as follows:

• The full payout is now taxable in the hands of shareholders.
• If the dividend amount exceeds Rs. 5,000, the corporation deducts tax at a rate of 10% under section 194.
• For AY 2021-22, the exception under section 10(34) is repeal.
• Section 115BBD’s provisions will not apply.

Some more important points to be noted about DDT

• DDT is a separate tax that must pay in addition to a company’s income tax liability. The corporation is not entitling for a reduction or credit for the DDT it has paid.
• Section 115BBD of the Income Tax Act of 1961 provides for a 15% tax rate on dividends received by an Indian company from its foreign affiliate.
• If a dividend is payable to anyone for or in place of the New Pension System Trust, no DDT is due.
• Furthermore, no deduction for any expenditure, allowance, or set-off of loss shall allow to the taxpayer in computing dividend income under the Act.

Conclusion

In India, the elimination of DDT and reinstatement of the traditional dividend tax system is a positive step that aligns with global tax regimes. It will also improve tax collection and decrease tax credit leakage. This also emphasizes the shift from a regressive to a progressive tax system. It will improve the market’s environment, making it more welcoming to international investors.