DIVIDEND TAXATION AFTER AMENDMENT AS PER FINANCE ACT,2020

DIVIDEND TAXATION AFTER AMENDMENT AS PER FINANCE ACT,2020

Written by CA Raj Maniyar

Introduction:

The Finance Act, 2020 has done away with the provisions of Dividend Distribution Tax (DDT) w.e.f. 01st April 2020. This means that any dividend declared and distributed after 01st April 2020 will now be the taxable in the hands of the shareholders and will no longer be exempt u/s 10(34) of the Income-tax Act,1961 (“the Act”). Consequently, the provisions of Sec 115BBDA taxing dividends in excess of Rs. 1 million in the hands of assessees (other than domestic companies) received from domestic companies at the rate of 10% has also been done away with.

The DDT regime was introduced in India in the year 1997 @7.5% which was increased to 20.56% over the years. One of the major reasons to withdraw the provisions of DDT and charging dividends in the hands of the shareholders is to deny the benefit of a lower rate of tax (10% u/s 115BBDA) to HNIs. Accordingly, dividends would now be chargeable to tax @ slab rates applicable to the assessees and not 10% u/s 115BBDA.

EFFECT OF THE AMENDMENT ON RESIDENT SHAREHOLDERS:

As per provisions of Sec 194, the tax has to be deducted @10% if dividends payable to the assessee by the company exceed Rs.5000/- in aggregate during the Financial Year. This would lead to additional compliances and hardships to certain assessees whose income is not chargeable to tax as they would now have to submit Form 15G/15H for non-deduction of tax on dividends paid to them. This would also lead to additional compliance on the company distributing the dividends as they too would have to keep a record of all the assessees in whose case the tax is not to be deducted.

EFFECT OF THE AMENDMENT ON NON-RESIDENT SHAREHOLDERS:

As per provisions of Sec 195, while making any payment to Non-residents which is not covered specifically under any other provisions of the Act, the tax has to be deducted at rates in force. ‘Rates in force’ means rates prescribed in Part II of the First Schedule to the Act. Accordingly, the rates are as follows:

For Non-Resident not being Company: 20% and for Foreign Company: 40%

However, as per provisions of Sec 90(2) and Sec 90A(2) of the Act, provisions of DTAA or the Act, whichever are more beneficial will apply to the assessee. But for availing the benefits of a DTAA, the non-resident assessee has to file a Tax Residency Certificate (TRC) along with Form 10F to prove that he is a Tax Resident of the state of which he claims to be a Resident. Questions have been raised by taxpayers on the validity of TRC as even if Form 10F has to be filed for filling in details not covered by a TRC, most of the tax deductors in India ask for a complete Form 10F.

Recently, the Ahmedabad Tribunal in the case of Skaps Industries India Pvt Ltd held that furnishing of TRC is merely procedural in nature and it cannot disentitle the assessee from claiming treaty benefits. It further held that Sec 90(4) and Sec 90A(4) not being a non-obstante clause cannot deny the assessee from claiming treaty benefits.

Obtaining a TRC would be beneficial to the non-resident assessee because most of the treaties that India has entered into with countries like USA, UK, Australia, Singapore and Mauritius provide for taxation of dividends at a rate ranging from 5% to 15% whereas most of the relevant provisions of the Act dealing with dividends payable to non-residents provide for a rate of 20%. Here is a list of taxation of dividends as per certain treaties that India has entered into with some countries:

SR.NO.DTAATAXABLE IN SOURCE STATE AT THE RATE PRESCIBED IN DTAA
1INDO-USAIf beneficial owner is a company holding atleast 10% in co. paying dividends, rate should not exceed 15%;In other cases, it cannot exceed 25%
2INDO-UKRestricted to 15% in cases where company paying dividends derives income from immovable property and such income is exempted from tax;In other cases, it cannot exceed 10%
3INDO-UAEIf recipient is beneficial owner, such tax cannot exceed 10%
4INDO-AUSTRALIAIf recipient is beneficial owner, such tax cannot exceed 15% of gross amount of dividends.
5INDO-MAURITIUSNot exceeding 5% if beneficial owner is a company holding directly at least 10% of capital of company paying the dividends.Not exceeding 15% in other cases
6INDO-SINGAPORENot exceeding 10% if beneficial owner is a company holding directly at least 25% of capital of company paying the dividends.Not exceeding 15% in other cases

As can be seen from the above table, in the majority of the cases, provisions of the DTAA are favourable than the provisions of the Act.

So, it will be advisable to the assessees to claim treaty benefits by obtaining a Tax Residency Certificate.   

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