Tax on Distributed Profit of Domestic Companies

Narendra Kumar

01 Aug, 2019

Company registered under Companies Act, 2013/1956 operating and doing Tax Distributed profit business in India. Financial year consisting 1^st April to 31^st March of every year, the company required to maintain its books of accounts and need to be audited by practicing Chartered Accountant. The financial audited by Auditor then place in the annual general meeting of the company which is required to be adopted by the company. Meanwhile under the discretion of Board of Directors of the company, can propose the dividend for its shareholder to be distributed. Subject to regulatory compliance on profit of company the proposed dividend for a year will be approved subject to shareholder consent and the distribution of profit process is initiated. The taxation department of the country call for dividend tax on distributed profit subject to regulatory provision explained under Income Tax Act, 1961 of a country.

While it’s come to taxation then it is necessary to understand the exact provision stated in issue under Income Tax Act read with its rule, if any applicable. Further, In Indian taxation system, the actual receiver of the dividend is not taxed either the same is exempted in the hands of the receiver, however, the company paying dividend required to pay tax on such distribution of profit of a company. Hence to enter more let’s go with a bare provision of Income Tax in India.

Section 115-O talks about the tax on distributed profits of a domestic company. The section starts with “Notwithstanding anything contained in any other provision of this Act” means whatever has written in Act will be overruled by this provision or this provision have no impact with any other provision of Act.  It further states in addition to income tax chargeable in respect of total income of a domestic company for any assessment year (AY) any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) out of current or accumulated profit shall be charged to additional income-tax @ 15%.

For example, ABC Private Limited declared 30,00,000/- as dividend then the company is bound to pay tax Rs. 4,50,000/- [15% of Rs. 30,00,000] as Tax on Distributed profit u/s 115-O.

Further, the tax liability of company u/s 115-O can be reduced by an amount of dividend if any received from its subsidiary and amount of dividend if any paid to any person for or on behalf of New Pension System Trust refereed u/s 10 (44).

Also, Read: A Detailed Guide for Freelancers on the applicability of Various Taxes.

What is a time limit to pay tax on distributed profit?

As per provision of Income Tax Act, principal officer of Company Registration shall be liable to pay tax distributed profit to the credit of Central Government within 14 days from the date of declaration, distribution or payment of dividend whichever is earliest.

What are the other prospects?

The tax paid on such event is final and no credit for same is not allowed to the company as it is final payment of tax.

No deduction is allowed to company or shareholder either of a case in respect of this payment.

Tax is not levied on distributed profit under this section in respect of any amount declared, Tax Distributed profit or paid by the specified domestic company by way of dividends to a business trust out of its current income. It does not allow distribution and payment of the dividend from accumulated profits. Since the specified date is there. The specified date means the date of acquisition by the business trust of such holdings as referred in below paragraph of the specified domestic company.

A specified domestic company as defined in Income Tax Act, 1961 refers to the domestic company in which business trust has become a holder of a whole of the nominal value of equity share capital of the company except nominee shares to be held by other to comply the regulatory compliance of the law.

After overruling the entire section, the subsection 8 of section 115-O states that tax distributed profit is not taxable in respect of total income of company is a unit of an International Finance Service Centre (IFSC), deriving income solely in convertible Foreign exchange, for any assessment year on any amount declared, distributed or paid by company by way of dividends on or after the 1^st day of April, 2017 out of its current income, either in hands of company or the person receiving such dividend. The income of IFSC should be fully derived from foreign exchange only. This subsection is introduced in Finance Act, 2016 w.e.f 1^st April 2017 i.e. AY 2017-18. Hence all the dividend paid, distributed and declared by IFSC in the Financial year ending 31^st March 2017 is not taxable and onwards.

Assessment year means the following financial year of current financial year. For example, the Financial Year 2017-18, Assessment year is Financial Year 2018-19. It is a concept of tax where the year is booked for earning and the same income is taxed in following year.