Dividend distribution tax computation

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Ankul Maheshwari (Querist)
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27 January 2014 Dear CA Club Members,

I want to clarify the computation of Dividend distribution TAX.

Case 1: Where DDT si computed on Paid amount:
Dividend paid to share holder - Rs. 100
Dividend Distribution Tax - 100 x 16.25%
DDT amount = Rs. 16.25

Total cash out flow from Company = 116.25

Case 2: Where DDT is computed on total out flow from Company:
Dividend paid to share holder - Rs. 100
Dividend Distribution Tax - 119.40 x 16.25%
DDT amount = Rs. 19.40

Total cash out flow from Company = 119.40

Which one is correct computation of Dividend Distribution Tax.

And also, Is it compulsory to pay DDT at subsidiary level before transferring Distributable profit to Holding company.
or DDT on Profits can be paid at Holding company level.

Plz help...

Ankul Maheshwari
Sr. Analyst - Corporate Finance

AVTAR SINGH

AVTAR SINGH (Expert)
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27 January 2014 Case 1 is the correct version because the DDT is charged on the amount declared, distributed or paid by company by way of dividend (whether interim or otherwise).
The DDT is to be paid by subsidiary company on dividend to holding co. and later on if the holding company distributes dividend then for the purpose of paying DDT, the dividend to be distributed shall be reduced by
amount of dividend received by the holding company during the financial year, if—

a. such dividend is received from its subsidiary;

b. the subsidiary has paid tax under this section on such dividend; and

c. the holding company is not a subsidiary of any other company.

Ankul Maheshwari

Ankul Maheshwari (Querist)
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30 January 2014 Thanks for your support Dear Avtar.

What about transferring distributable profits to Holding company, can a subsidiary transfer that to Holding with out paying tax
and TAX can be paid at Holding level only.

Making it simple:
Holdco. has 3 Subsidiary. can we accumulate distributable profit of all 3 subs. compnay at holdo. and then pay tax at Holdo level.

Thanks

Ankul

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AVTAR SINGH

AVTAR SINGH (Expert)
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30 January 2014 No. it is not possible for subsidiary company to transfer profit without payment of DDT.

Ankul Maheshwari

Ankul Maheshwari (Querist)
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30 January 2014 Dear Avtar,

Do we have any regulation (Section name) which clearly says the same, the Regulatory explanation given by you on first reply is clear to me but in that they saying that dividend amount shall be reduced by amount on which subsidiary has paid tax under this section.

This section refers to Section-115 O and Reduction refers to 115 O (1A)

http://wirc-icai.org/wirc_referencer/income%20tax%20&%20wealth%20tax/Dividend%20Distribution%20Tax.htm

Given link expplains 115 O, but it only talks of Holdco. (referred as Domestic company, no explanation for Subsidiary has been mentioned)

There is a penalization u/s 115-Q- which talk about penalty u/s 221 of act but thats all regarding Holdo.

which also means that if Subsidiary hasn't paid TAX under ddt section, no reduction will be applicable (In other way)

Thanks

Ankul

AVTAR SINGH

AVTAR SINGH (Expert)
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30 January 2014 Section 115o(1) says 'Notwithstanding anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2003, whether out of current or accumulated profits shall be charged to additional income-tax (hereafter referred to as tax on distributed profits) at the rate of fifteen per cent.

In your case the dividend is to be paid by Subsidiary co. which is covered in the definition of Domestic Co. In fact, Domestic includes Holdco. That's why (1A) makes concession for Holdco. Condition of payment of tax under this section is there because this section came into effect from 1.4.2003. And suppose dividend is recd. prior to 1.4.2003 and holding co. declares dividend after this date, then it cant claim deduction.