Dividend & Income Dist. Tax


Dividend & Income Dist. Tax

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Income Tax
Dividend and Income Distribution Tax to be grossed up [Section 115-O&115R]

Dividend and Income Distribution Tax to be grossed up [Section 115-O&115R][W.e.f.1-10-2014]

Section 115- O provides that a domestic company shall be liable for payment of additional tax at the rate of 15% on any amount declared, distributed or paid by way of dividends to its shareholders. This tax on distributed profits is final tax in respect of the amount declared, distributed or paid as dividends and no credit in respect of it can be claimed by the company or the shareholder.

Section 115R similarly provides for levy of additional income-tax in respect of income distributed by the mutual funds to its investors at the rates provided.

Prior to introduction of dividend distribution tax (DDT), the dividends were taxable in the hands of the shareholder. The gross amount of dividend representing the distributable surplus was taxable, and the tax on this amount was paid by the shareholder at the applicable rate which varied from 0 to 30%. However, after the introduction of the DDT, a lower rate of 15% is currently applicable but this rate is being applied on the amount paid as dividend after reduction of distribution tax by the company. Therefore, the tax is computed with reference to the net amount. Similar case is there when income is distributed by mutual funds.

Due to difference in the base of the income distributed or the dividend on which the distribution tax is calculated, the effective tax rate is lower than the rate provided in the respective sections.

In order to ensure that tax is levied on proper base, the amount of distributable income and the dividends which are actually received by the unit holder of mutual fund or shareholders of the domestic company need to be grossed up for the purpose of computing the additional tax.

Therefore, the Act has inserted section 115-O(1B) in order to provide that for the purposes of determining the tax on distributed profits payable in accordance with the section 115-O, any amount by way of dividends referred to in section 115-O(1), as reduced by the amount referred to in section 115-O(1A) [referred to as net distributed profits], shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in section 115-O(1), be equal to the net distributed profits.

Illustration

R Ltd. an Indian company wishes to distribute `9,00,000 as dividend to its shareholders. It has received `4,00,000 as dividend from its subsidiary domestic company on which subsidiary company has already paid D.D.T. Determine the amount of dividend distribution tax payable if such dividend is distributed on or after 01-10-2014.

Solution

Net dividend on which DDT is payable `

 

  RS

Amount of dividend to be distributed to shareholders

Less: Dividend received from subsidiary company on which DDT has already been paid 

9,00,000

 4,00,000

Net dividend liable to DDT  5,00,000 

Computation of DDT                                      

  Alternative 1                                              

`5,00,000 × 19.994% (effective rate)                      

 Alternative 2                                                            

Net dividend to be gross up                                

`5,00,000 × 100/8 Gross amount `5,88,235                

 DDT payable on 5,88,235 @ 16.995% 

 

99,970

 

 

99,970 

Similarly, the Act has inserted section 115R(2A) to provide that for the purposes of determining the additional income-tax payable in accordance with section 115R(2), the amount of distributed income shall be increased to such amount as would, after reduction of the additional income-tax on such increased amount at the rate specified in section 115R(2), be equal to the amount of income distributed by the Mutual Fund.

It may be noted that the rate of income distribution tax prescribed under section 115R(2) is as under and the same will have to be grossed up in the above manner to determine the effective rate of income distribution tax:

1. (a) Where the income is distributed to any person being an individual or a 25% HUF by a money market mutual fund or a                liquid fund

    (b) Where the income is distributed to any other person by a money market 30% mutual fund or liquid fund.

2. Where the income is distributed by a fund other than a money market mutual fund or a liquid fund and such income is distributed to—

   (a) Individual or HUF 25%

  (b) Any person other than individual or HUF 30%

However, income from investment made by a non-resident (not being a company) or a foreign company in an Infrastructure debt fund (IDF) whether set up as a IDF-NBFC or IDF-MF, the tax rates shall be 5% on income distributed by a Mutual Fund under an IDF scheme to a non-resident Investor.BACK

 

 

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