dividend distribution tax

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

14 October 2014 Dear Sir ,

I want Brief information about Dividend Distribution Tax / Corporate Dividend Tax.

Kindly explain......

CS Mitesh Mehta

CS Mitesh Mehta (Expert)
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21 October 2014 Section 115-O of the Act provides that a domestic company shall be liable for payment of additional tax at the rate of 15 per cent. on any amount declared, distributed or paid by way of dividends to its shareholders.

Prior to introduction of dividend distribution tax (DDT), the dividends were taxable in the hands of the shareholder. The gross amount of dividend representing the distributable surplus was taxable, and the tax on this amount was paid by the shareholder at the applicable rate which varied from 0 to 30%.

Post introduction of section 115O, the dividend was treated as exempt in the hands of such shareholders and the company declaring such dividend was required to pay Dividend Distribution tax (DDT) on the amount of dividends actually paid. The objective behind this transition was to simplify the tax collection mechanism on income distribution, as the number of companies paying such dividend was much less as compared to the number of shareholders receiving such dividend.

As per current rules, the DDT is 15% plus additional surcharge. The effective tax rate comes to around 16.995%.

In Budget 2014-15, the government has proposed to apply the DDT by grossing up the said amount. So, for instance if Rs. 85 was the dividend amount and 15% of it was DDT, new proposals would mean DDT is levied on Rs. 100 and thus the tax will go up by around 2.25%

The higher tax being paid by companies will essentially mean investors get lower dividend.