INSUBCONTINENT EXCLUSIVE:
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
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
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.