Dividend Distribution Tax: Here’s All You Need to Know

Narendra Kumar

08 Nov, 2019

The Shareholder is the one who invests in the Company by purchasing the shares from the open market or through the transfer of shares. The Company in return gives the dividend to the shareholder of the Company depending upon the profit available for the financial year. Dividend constitutes income on the hands of the Shareholder on prima facie it constitutes subject to the income tax. However, Income-tax laws^[1] in India provide an exemption of the Dividend Received by the shareholder by the Indian Company by levying a Dividend Distribution Tax on the Company.

What is the Dividend Rate applicable to the Company?

If the Company has declared the Dividend it is required to pay the Dividend Distribution Tax at the rate of 15% on the gross amount of dividend effective rate is 20.56% including the surcharge and the education cess.

Dividend Distribution Tax Liability and when it requires to pay it?

The Company who is declaring the Dividend is liable to pay the Dividend Distribution tax on distributed profits within 14 days of the declaration, distribution, or payment of dividend whichever is earlier.

What will be effective in the books of accounts if the holding Company receives the dividend from the subsidiary company both being the domestic company?

When the holding Company receives the Dividend from its subsidiary company, then according to the following dividend distribution tax will be liable:

• Dividend distributed/declared/paid during the year

• (Less)  Dividend received by the holding company during the year

*Subject to certain conditions

Notes: No tax will be chargeable/payable by a Company located in an International Financial Service Centre generating income only from the convertible foreign exchange on profits distributed from total profits for any tax year on any amount declared, distributed or paid by the Company by way of Dividend on or after 1^stApril, 2017 out of its current income either in hand of the Company or person receiving such dividend.

Example: A ltd is holding Company where B ltd holds 50% of Share in A Ltd

What is the tax required to pay if the dividend is received from the foreign Subsidiary Company?

As per the insertion of new section 115BBD^[2] of the Income Tax Act, if any dividend declared or paid by a specified foreign company* and it is receivable in the hand of Indian Company then there is a concessional rate of tax in respect of dividend i.e. 15%(plus surcharge and cess as applicable). However, if the dividend received from the foreign company it is taxed at the normal applicable tax rate i.e. 30%. Hence if the dividend is received from the foreign company then it is charged at the rate of 30% in the hands of Indian Company. Dividends received from a foreign company will be charged under the head “Income from other sources.”

Also, Read: Tax on Distributed Profit of Domestic Companies

Notes:Where a trust holds 100% of the share capital of a domestic company, Dividend Distribution Tax shall not be chargeable on any amount declared, distributed or paid by the domestic company by way of dividends to the trust out of its current income on or after the date of acquisition of such holding by the trust.

Let’s understand how the Dividend Distribution Tax is calculated:

Dividend Distribution Tax is dividend on shareholder’s income the tax is paid by the Company on behalf of Shareholders. For example, a company wants to declare a dividend of Rs. 100 (this would be considered as the net amount), it requires to gross up the by including the DDT i.e 15% + surcharge 12% (15*12% = 1.8)+ Cess 3% (16.8*3% = 0.504) = 17.304%.

The dividend declared above should be net of the tax deducted by 17.304% so the dividend should be (100-17.304) % = 82.696%. The Dividend is Rs. 100 so gross amount comes 100/82.696% = Rs. 120.92. So the dividend % on the gross amount is 20.93%.

Non Compliance

A company has to pay dividend distribution tax on the dividends declared. If the company fails to pay the dividend distribution tax, then interest will be accumulated at 1% per month or part thereof until the date on which tax to be paid.

Conclusion

Also, Read: GST Provisions for Input service distributor

The dividend is receivable to the shareholder as income by the Company who is declaring the Dividend and on behalf of the shareholder the Company pays the Dividend Distribution Tax and it becomes an obligation on the Company once the dividend is declared and required to pay the tax. Hence, if the dividend is declared the Company needs to take care of paying the tax within the stipulated period of time. More information related to taxation, Contact us.