Dividend Distribution Tax (DDT) is an additional amount of tax to be paid compulsorily by every domestic company in addition to the income-tax chargeable in respect of the total income of such domestic company for any assessment year.
In other words, all domestic companies are liable to pay DDT even if there is no income-tax is payable by such domestic companies on their total income computed in accordance with the provisions of Income Tax Act, 1961. This notes have been amended by the Finance Act, 2016 which shall be applicable for the financial year 2016-2017.
Tax on distributed profits of domestic companies
In accordance with section 115-O (1) of the Income-tax Act, 1961 any amount declared, distributed or paid by domestic company by way of dividends shall be charged to additional income-tax at the rate of 15 per cent. Such dividend includes interim dividend and it can be paid out of either current or accumulated profits.
Exemption to Shareholders:
The DDT is levied at the time when company distributes, declares or pays any dividend to its investors/ shareholders. Consequently, the amount of dividend received by the shareholders of such company shall not be included in the total income of the shareholder as because such dividend will be exempt by virtue of exemption provided u/s 10(34).
Therefore, dividend received from domestic company is not taxable in hands of shareholders. However, deemed divided received under section 2(22)(e) from an Indian company or any dividend received from a foreign company is taxable in hands of shareholders.
Effective rate of tax on distributed income:
The tax on distributed profits u/s 115-O shall be payable @15% plus surcharge @12% plus Education Cess (EC) @2% plus SHEC @1% of amount of dividend so declared, distributed or paid. Thus, dividends paid by a domestic company are subject to the DDT at an effective rate of 17.304% w.e.f. 1st day of April, 2016.
Tax on Dividend Amount received from Subsidiary Company [Section 115-O(1A)]
With effect from 1st day of June, 2013 the benefit of reduction of dividend received by a domestic company from its foreign subsidiary has been extended by the Finance Act, 2013 by amending the clause (i) of section 115-O (1A).
Accordingly, the dividend received by the domestic company from its foreign subsidiary, in respect of which tax is payable u/s 115BBD by the domestic company, would be reduced from the dividend declared, distributed or paid by the domestic company. Therefore, the dividend distribution tax shall be levied @15% on the amount so reduced.
As per section 115-O (1A) of the Income Tax Act, 1961 as substituted by the Finance Act, 2013, w.e.f. 1-6-2013, the amount referred to in section 115-O (1) shall be reduced by,
(i) the amount of dividend, if any, received by the domestic company during the financial year, if such dividend is received from its subsidiary and,
(a) where such subsidiary is a domestic company, the subsidiary has paid the tax which is payable under this section on such dividend; or
(b) where such subsidiary is a foreign company, the tax is payable by the domestic company under section 115BBD on such dividend:
Provided that the same amount of dividend shall not be taken into account for reduction more than once;
(ii) the amount of dividend, if any, paid to any person for, or on behalf of, the New Pension System Trust referred to in clause (44) of section 10.
Note that a company shall be a subsidiary of another company, if such other company, holds more than 50% in nominal value of the Equity Share Capital of the company.
In accordance with the provisions of section 115-O(1B) inserted by the Finance (No. 2) Act, 2014, w.e.f. 1-10-2014, for the purposes of determining the tax on distributed profits payable in accordance with section 115-O, any amount by way of net distributed profits, shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in sub-section (1), be equal to the net distributed profits.
No Tax on Dividend by Domestic Company to Business Trust [Section 115-O(7)]
A) Dividend out of Current Income:
With effect from 1st April, 2016, there will be no tax on distributed profits shall be chargeable under section 115-O in respect of any amount declared, distributed or paid by the specified domestic company by way of dividends to a business trust out of its current income on or after the specified date.
Specified Domestic Company means a domestic company in which a business trust has become the holder of whole of the nominal value of equity share capital of the company.
However, the equity share capital required to be held mandatorily by any other person in accordance with any law for the time being in force or any directions of Government or any regulatory authority, or equity share capital held by any Government or Government body shall be excluded for the purpose of section 115-O(7) of the Income-tax Act, 1961.
Specified Date means the date of acquisition by the business trust of 100% equity share capital.
B) Dividend out of Accumulated and current Profits:
Dividend distributed tax shall be paid in respect of any amount declared, distributed or paid, at any time, by the specified domestic company by way of dividends out of its accumulated profits and current profits up to the specified date.
No dividend Tax for unit of an International Financial Services Centre [Section 115-O(8)]
No tax on distributed profits shall be chargeable in respect of the total income of a company, being a unit of an International Financial Services Centre, deriving income solely in convertible foreign exchange, for any assessment year on any amount declared, distributed or paid by such company, by way of dividends on or after the 1st day of April, 2017, out of its current income, either in the hands of the company or the person receiving such dividend.
International Financial Services Centre shall have the same meaning as assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005.
Unit means a unit established in an International Financial Services Centre, on or after the 1st day of April, 2016.
Convertible Foreign Exchange means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Management Act, 1999 and the rules made thereunder.
Time limit and responsible person for DDT Payment
DDT shall be paid to the credit of the Central Government within 14 days from the date of declaration, distribution or payment of any dividend whichever is earliest by the principal officer of the domestic company and the company.
NO Further Credit:
As per sub-section (4) of section 115-O, the tax on distributed profits so paid by the company shall be treated as the final payment of tax in respect of the amount declared, distributed or paid as dividends. Therefore, no further credit shall be claimed by the company or by any other person in respect of the amount of tax so paid.
NO Deduction Allowed:
Please note that there will be no deduction under any other provision of Income-tax Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to dividend distribution tax.