Impact of Removal of Dividend Distribution Tax- Elimination of DDT (profit distribution tax) under the Finance Act 2020 (FA 2020) and its effect on other provisions of the Income Tax Act 1961
Existing provisions (before amendment):
Article 115-O states that in addition to the taxable income tax in relation to the total income of the local company, any amount that is declared, distributed, or paid by way of dividend distribution is induced by an additional 15 percent income tax. The tax paid on these profits is treated as the final tax (called DDT). However, the profit tax @ 30% is collectible on profits considered under Section 2 (22) (e).
Now, Article 10 (34) states that any income through the distribution of profits, referred to under Section 115-O, is excluded from the total shareholder income.
It should be noted that the exemption available under Article 10 (34) will not be permitted with respect to the revenue from the profits imposed on him in accordance with the provisions of Article 115 BBDA, even if the dividend tax is paid by the local company on this amount of profits.
Article 115BBDA provides a tax on some profits received from local companies (taxable profits in the hands of the shareholder):
• Any income received by a gross profit in excess of 10 lakh is responsible for taxation in the case of a specified resident (a person residing in India other than a local company, fund, institution or trust fund referred to 10 u / s (23C) or 12AA) at a rate of 10 %.
Furthermore, no deduction is permitted in the income account by way of dividend distribution.
Likewise, the company or the mutual fund shall pay an additional income tax on the income distributed to the holders of its units at the prescribed rates, and the income from the units that the unitholder receives is exempt from income tax 10 u / s (35).
Amended provisions:
It is adjusted so that the profits or income from the units are subject to tax in the hands of shareholders or unitholders at the applicable price, and the local company, company, or specific funds are not required to pay ADD. It also provides that the deduction of expenses under Article 57 of the law be a maximum of 20 percent of the profits or revenues from the units. Moreover, some adjustments have also been made in the various divisions to remove the cascading effect, remove the exemption from exemption u / s 10 (34) / 10 (35) from the dividends/revenue received in the hands of the shareholder/unit holder, and introduce new provisions providing for a discount Tax on dividend income/income.
A note clarifying the amendment:
Thus, the occurrence of the tax falls on the payment company / mutual fund and not on the recipient, as it should normally be. Yield is income in the hands of shareholders, not in the hands of the company. Therefore the tax should be incurred by the recipient. Moreover, the current provisions impose a flat-rate tax on dividends distributed in all areas, regardless of the marginal rate by which the beneficiary is taxed in another way. Hence, the judgments are unjust and reactionary.
The above amendment will introduce various other amendments to the law as well. The following are the main effects of the various provisions:
The effect of the amendment on mutual funds:
Income from mutual fund units, which are currently exempt, is subject to distribution tax, subject to tax in the hands of the unit owner. It also stipulates that the payer will deduct TDS at 10% on this income if it exceeds 5,000, and the unitholder is based in India. In the case of a nonresident unitholder, the taxpayer deducts the tax by 20%. Impact of Removal of Dividend Distribution Tax
The impact of the amendment on business confidence:
Current ruling: Profits gained from commercial trust funds are exempted from income tax in the hands of recipients.
Amended Provisions: Taxation of these profits in the hands of the unitholder.
The effect of the amendment on the possibility of taxing profits from a special purpose vehicle (SPV) in the hands of a unitholder from a commercial fund:
Income gained from business confidence in the nature of the stock dividend from SPV, which was previously tax-free, is now required to be taxed by the unitholder. The restriction on interest expense has been imposed to the extent of 20 per cent of the income from the Mutual Fund.
Removal of the exemption in the hands of shareholders and unitholders: The exemption was canceled u / s 10 (34) with regard to profit income and income k / s 10 (35) with respect to units.
Some amendments have been made to the provisions of the Communications Division to give the same effect:
Article 194K – TDS regarding income in relation to mutual fund units @ 10% with threshold limit of Rs 5,000 / -.
194LBA – certain income from commercial trust units
Now, the Business Fund, while distributing dividends to its unitholders, must also discount TDS at the following rates:
Payment for resident unitholders @ 10%
Payment for non-resident unitholders @ 5%
Section 196A – Income Regarding Nonresident Units: TDS applicability to income regarding Resident Mutual Fund Units is paid to nonresidents @ 20%
Section 196C – Income from Bonds in Foreign Currencies or Indian Company Shares: Now, TDS @ 10% discount is provided on profits paid to nonresidents in relation to global deposit receipts.
Section 196D- Foreign Institutional Investor Income from Securities: Now, TDS @ 20% discount is provided on profits paid to the foreign institutional investor.
Section 194 – Dividend Distribution: TDS will be deducted at 10% on profits paid to anyone at the threshold of Rs 5,000.
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