We are pleased to present the latest edition of Tax Street – our newsletter that covers all the key developments and updates in the realm of taxation in India and across the globe for the month of January 2020.
- The 'Focus Point' section the removal of Dividend Distribution Tax, which was one of the significant announcements in the Union Budget 2020.
- Under the 'From the Judiciary' section, we provide in brief, the key rulings on important cases, and our take on the same.
- Our 'Tax Talk' provides key updates on the important tax-related news from India and across the globe.
- Under 'Compliance Calendar', we list down the important due dates with regard to direct tax, transfer pricing and indirect tax in the month.
Dividend Distribution Tax abolished – is this move in the right direction?
In the backdrop of slowdown in the Indian economy, there were huge expectations from Union Budget 2020. Capital markets and corporates were expecting a slew of measures which included removal of Dividend Distribution Tax (DDT), changes in long term capital gains, an increase in tax exemption slabs for individuals, etc.
The Union Budget 2020 was announced on 1 February 2020 and the removal of DDT was one of the significant announcements made.
Current Tax Regime for Dividends
Under the current regime, the corporates are required to pay a DDT of 20.56% over and above the corporate tax paid before distributing the surplus to the shareholders. Further, such a dividend was also taxed in the hands of certain shareholders at 10% (plus applicable surcharge and education cess). This resulted in three-level taxation which was considered very draconian. Accordingly, there was a demand from the corporates and stakeholders to abolish DDT.
New Tax Regime for dividends
The Union Budget 2020 has now abolished the DDT and has restored the traditional taxation system of dividends whereby dividends would be taxed in the hands of the shareholders/investors. Further, the concessional rate of taxing dividends at 10% (plus applicable surcharge and education cess) and exemption of no tax on dividend up to INR 1 million has also been removed. This would mean that the dividends would now be taxed in the hands of shareholders/investors at the applicable rates.
Further, the Union Budget proposal also requires corporates declaring dividend to withhold taxes on dividend declared to the shareholder at 10% for resident and at applicable rates for non-residents. The provisions also provide that only interest expenditure would be allowed as a deduction from the income and the same would be restricted to maximum 20% of the income. The law provides for providing credit to companies receiving dividend which in turn are also declaring dividends out of the same amount subject to certain conditions.
However, no exemption is provided for Indian companies receiving dividends from a foreign subsidiary and then declaring the same to its shareholders. Earlier, for computation of DDT, the dividend received from foreign subsidiaries was required to be excluded.
To view the full article, please click here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.