Tax Treatment of Dividend For Shareholder and Company - As Amended by Finance Act 2020.

Discussion of amended Section 10(35), section 115-O, section 194, Section 115BBDA, section 57, section 80M as per Finance Act, 2020 in detail.

Background

Upto AY 2020-2021, dividend income received by shareholder of domestic company shall not liable to pay tax on such dividend as per section 10(34) of the Act. However, in such case, the domestic company shall be liable to pay dividend distribution tax (DDT) on such dividend under section 115-O of the Act.

As per Finance Act, 2020, provisions of section 115-O has been amended to exempt the company to pay DDT on dividend distributed on or after 01-04-2020. Thus, after 01-04-2020, company shall not be liable to pay DDT on dividend and hence, company is exempt. Now, the burden of tax has been shifted on shareholder and they will be liable to pay tax on such dividend income.

To bring this into force, various provisions of Finance Act, 2020 has been amended, which we will be discussing further in this post.

Definition of Dividend

Dividend usually refers to the distribution of profits by a company to its shareholders. However, in view of Section 2(22) of the Income-tax Act, the dividend shall also include the following:

(a) Distribution of accumulated profits to shareholders entailing release of the company's assets;

(b) Distribution of debentures or deposit certificates to shareholders out of the accumulated profits of the company and issue of bonus shares to preference shareholders out of accumulated profits;

(d) Distribution to shareholders out of accumulated profits on the reduction of capital by the company; and

(e) Loan or advance made by a closely held company to its shareholder out of accumulated profits

but "dividend" does not include—

(i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ;

(ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, and before the 1st day of April, 1965

(ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company

(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off;

(iv) Any payment to shareholders on buyback of shares of the company

(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).

Taxability of dividend received on or after 01-04-2020

Domestic Companies obligations

1. Amendment in section 115-O

Relevant text- Notwithstanding anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2003 [but on or before the 31st day of March, 2020], whether out of current or accumulated profits shall be charged to additional income-tax (hereafter referred to as tax on distributed profits) at the rate of fifteen per cent

* Inserted by Finance Act 2020

It means domestic companies shall not be liable to pay DDT on dividend distributed to shareholders on or after 01-04-2020.

2. Amendment in Section 194

Relevant text- The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall, before making any payment [by any mode] in respect of any dividend or before making any distribution or payment to a shareholder, who is resident in India, of any dividend within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2, deduct from the amount of such dividend, income-tax [at the rate of ten per cent] :

Provided that no such deduction shall be made in the case of a shareholder, being an individual, if—

(a) the dividend is paid by the company by [any mode other than cash]; and

(b) the amount of such dividend or, as the case may be, the aggregate of the amounts of such dividend distributed or paid or likely to be distributed or paid during the financial year by the company to the shareholder, does not exceed [five thousand] rupees:

Provided further......................no amendment

Provided [***] - Deleted

*Amended by Finance Act 2020

It means as per the Section 194, which shall be applicable to dividend distributed, declared or paid on or after 01-04-2020, an Indian company shall deduct tax at the rate of 10% from dividend distributed to the resident shareholders if the aggregate amount of dividend distributed or paid during the financial year to a shareholder exceeds Rs. 5,000.

Taxability in hands of shareholders