Dividend income no longer a sweet exempt pie!!

1
Dividend income no longer a sweet exempt pie!!
2

• Finance Act, 1997 bought about a radical change
  in the system of taxing distribution of dividends
  by inserting section 115-O of the Income-tax Act,
  1961 ('Act'). The tax on dividend was over and
  above the taxes paid by the company on its
  profits. This amendment was often criticised as
  it amounted to double taxation in the hands of
  the company and again in the hands of
  shareholders.
• Dividend distribution tax ('DDT')was abolished in
  the year 2002 and the budget for the financial
  year 2002-2003 proposed the removal of DDT by
  bringing back the regime of dividends being taxed
  in the hands of the shareholders/ recipients.
• However, in line with the view that it is easier
  to collect tax at a single point i.e. from the
  company rather than individual shareholders, the
  Finance Act, 2003 re-introduced section 115-O of
  the Act and taxed the amounts so declared,
  distributed or paid by way of dividend in the
  hands of the company. Consequently, deduction
  under section 80L (available to individuals) was
  discontinued. Also, dividend liable to DDT under
  section 115-O of the Act was exempted from tax in
  the hands of shareholders pursuant to section
  10(34) of the Act.
• At present, company declaring dividend as
  defined in section 2(22) of the Act is liable to
  pay DDT at the rate of 15 on the amount declared
  as dividend. Dividend income is exempt in the
  hands of shareholders under section 10(34) of the
  Act. Dividend distribution tax is not applicable
  on distribution of dividend under section
  2(22)(e) of the Act. Dividend under section
  2(22)(e) of the Act is subject to withholding
  under section 194 of the Act at the rate of 10
  and is taxable in the hands of shareholders.

3

• Budget 2016 proposal relating to taxation of
  dividend income
• The Finance Bill, 2016('Finance Bill') proposes
  to amend the exemption provided in section 10(34)
  of the Act by excluding resident individual,
  Hindu undivided family ('HUF') or a firm having
  income from dividend exceeding Rs. 10 lakhs.
• Finance Bill intends to introduce the said
  exclusion from exemption under section 10(34) of
  the Act by introducing section 115BBDA.
• The legislative intent of introducing taxation on
  dividend is to remove vertical inequality amongst
  the tax payers i.e. those who have high dividend
  income are subjected to tax only at the rate of
  15 whereas such income in their hands would have
  been chargeable to tax at the rate of 30.
• Dividend income received from a domestic company
  by resident individual, Hindu undivided family
  ('HUF') or a firm exceeding Rs. 10 lakhs shall be
  subject to tax in the hands of recipient.
• The amount of income-tax calculated on the income
  by way of aforementioned dividends shall be taxed
  at the rate of 10 (plus surcharge and cess).
• No deduction in respect of any expenditure or
  allowance or set off of loss shall be allowed to
  the assessee under any provision of the Act in
  computing the income by way of dividends.
• For the purpose of section 115BBDA, "dividends"
  shall have the same meaning as is given to
  "dividend" in section 2(22) of the Act but shall
  not include 2(22)(e) of the Act.

4
Our observations The proposal seems to be
contrary to the intention of introducing section
115-O of the Act. Also, post legislation of the
aforementioned proposal, the effective base tax
paid on dividend income for specified class of
shareholders shall be 25 (i.e. 15 dividend
distribution tax 10 dividend tax). Further,
it may be relevant that the provision could
elaborate as to the meaning of an 'individual' as
under the Act, some assesses may be considered
/assessed as individuals.
5
To read more, please click here