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Lack of clarity over date for dividend tax worries Street

The law has left a gap for overzealous tax officers to interpret.

, ET Bureau|
Last Updated: Feb 28, 2020, 11.15 AM IST
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Dividend Distribution Tax (DDT)
The law has left a gap for overzealous tax officers to interpret it in a way where both the company and shareholders are asked to fork out tax.
How will the tax on dividend play out when a company declares dividend before March 31, but shareholders receive the money on or after April 1? The law has left a gap for overzealous tax officers to interpret it in a way where both the company and shareholders are asked to fork out tax.

According to the amendments proposed in the Union budget, the dividend distribution tax (DDT) would not be payable by companies or mutual funds (as per section 115-O / 115-R, respectively) in respect of dividends or income “declared, distributed or paid” after March 31, 2020. Simultaneously, the earlier tax exemption given to investors – under section 10(34) and 10(35) of the Income Tax Act – on dividends from shares and MF units would now be removed with effect from April 1, 2020.

Thus, while DDT is payable on any dividend/income which is “declared, distributed or paid” up to March 31, the tax exemption is removed on dividends “received” after March 31.

“This could lead to hardship and litigation, depending on how the Income Tax Department interprets the law. The Companies Law allows distribution of dividend within a month of declaration of the dividend. So, a company which holds meeting to declare dividend around mid-March and pays by mid-April is in compliance with the Companies Law but may still end up paying higher tax,” said senior chartered account Dilip Lakhani. This is because there is always a risk that such a company could be liable to pay DDT and the shareholder could also be asked to pay tax on dividend income as benefit of S 10 (34) will not be available. “The anomaly should be addressed by the government,” said Lakhani.

Among others, this will be an issue for companies which are unable to hold their board meetings well before the closing of the financial year to declare and distribute dividend within the timeframe laid down under corporate law. In some cases companies may choose to make the actual dividend payment after March 31 due to cash-flow reasons but nonetheless are keen to declare it in March to reduce tax on shareholders — many of whom are in the highest tax bracket and would have to pay as high as 42% income tax.

There was no immediate response to ET’s query from a spokesperson of the apex I-T body, Central Board of Direct Taxes. However, multiple senior tax professionals ET spoke to said there is a need to amend the proposed amendments.

“Some tax officers do take outlandish stand while completing assessment. So, nothing should be left to interpretation or chance. It is possible — even though it would be unfair and irrational — that an assessing officer may take a stand that if a dividend has been declared prior to April 1, 2020 (and on which DDT has been paid), but has been received by the shareholder or unit holder on or after April 1, 2020, it would be taxable in the hands of the latter,” said Ameet N Patel, partner at Manohar Chowdhry & Associates, a firm of chartered accounts.

One way to dispel doubt would be to cross-link the amendments in section 115-O / 115-R to the amendments in section 10(34)/ 10(35) to make it clear that only dividend or income which has not been subject to DDT will be taxed in the hands of the shareholder or unit holder.

Hitesh D Gajaria, partner and cohead of tax at KPMG India, also agrees that interim dividends declared prior to March 31, 2020, but paid out in April or thereafter could potentially face the risk of both DDT as well as shareholder level taxation. “Some form of transition relief or clarification in the context of such situations by excluding dividends on which DDT is paid from shareholder level taxation will be welcome,” said Gajaria.

It’s a question that many closely-held companies and entities where promoters have a substantial control are grappling with. “Also, unlisted entities with December financial closing may choose to declare dividend in March when they typically hold AGMs,” said Lakhani.

Public sector undertakings, however, face a different dilemma. These units would be better off announcing dividend in the new financial year and avoid DDT. But, they could well be under compulsion to announce as well as distribute dividend before March 31 to let the government book the amounts as earnings for the current fiscal.
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