India: Tax On Distributed Profits

Last Updated: 9 April 2013

Article by Megha Kapoor and Sanjana Bakshi*

In simple terms, distributed profits are those earnings which are shared with shareholders as dividend. Section 115-O of the Income Tax, 1961 refers to dividend ditribution tax as an additional income tax. Such tax is not in the nature of withholding tax. It is a levy on the post tax profits of the company out of which the dividend is declared or distributed.

Thus, it is clear that the dividend distribution tax is an income tax on the distributable profits of the domestic company.

Pre-Amendment

Section 115-O: - Tax On Distributed Profits of Domestic Companies

The Domestic Company shall, in addition to the income tax chargeable in respect of its total income, be liable to pay additional income tax on any amount declared, distributed or paid by such company by way of dividend (whether interim or otherwise), whether out of current or accumulated profits and shall be charged to additional income-tax at the rate of 15%. This is also referred as tax on distributed profits.

The amount referred under Section 115-O(1) i.e. dividend to be distributed shall be reduced by1

a) the amount of dividend, if any, received by the domestic company during the financial year, if -

i. such dividend is received from its subsidiary;

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

iii. the domestic company is not a subsidiary of any other company.

However, the same amount of dividend shall not be taken into account for reduction more than once.

b) The amount of dividend paid to any person for, or on behalf of, the New Pension System Trust established on the 27th day of February, 2008 under the provisions of the Indian Trusts Act, 1882. The benefit u/s 115-O (1A) is available only to the ultimate holding company. But ultimate holding company can claim the benefit on dividend received from multiple subsidiary companies.

No income tax shall be paid by the Domestic Company on its total income which is computed in accordance with this Act, the tax on distributed profits payable by such company.

The principal officer of the domestic company and the company shall be liable to pay the tax on the dividend distribution profit within 14 days from

  • the date of declaration or
  • distribution or
  • payment of any dividend,

Whichever is earlier

Further, the tax on dividend distribution profit shall be treated as the final payment of the tax in respect of the amount declared, distributed or paid as dividends and no further credit shall be claimed by the company or by any other person in respect of the amount so paid.

The company or the shareholder shall not be allowed any deduction in respect of the amount which has been charged to tax or the tax thereon under Sec. 115-O(1). The interpretation of this clause is that no deduction shall be allowed to the shareholder under any provision of the Income tax Act, 1961 in respect of any expenditure which he has incurred on collection or earning of the dividend.2

No tax on distributed profits shall be chargeable in respect of the total income of an undertaking or enterprise engaged in developing or developing and operating or developing, operating and maintaining a Special Economic Zone for any assessment year on any amount declared, distributed or paid by such Developer or enterprise, by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2005 out of the current income either in the hands of the Developer or enterprise or the person receiving such dividend.

Accordingly dividend distribution tax is chargeable on amount declared, distributed by way of dividend by the said undertaking or enterprise after 1-6-2011.

Post-Amendment

The Government had been trying to make the tax laws simpler every year; however, there are numerous amendments required in the tax laws. The union budget for the Financial Year 2013-14 was presented before the Parliament on 28th February 2013 and the finance minister has made many changes in the Income Tax Act.

The Amendment in relation to "tax on distributed profits of the domestic companies" by Financial Bill of 2013 is as follows:-

The Clause 27 of the Bill amended Section 115-O of the Income-tax Act relating to tax on distributed profits of domestic companies.

Under the existing provisions contained in sub-section (1A) of section 115-O, the amount of dividends referred to in sub-section (1) shall be reduced by the amount of dividend, if any, received by the domestic company during the financial year, if -

a. such amount of dividend is received from its subsidiary ; and

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

The said sub-section also provides that the same amount of dividend shall not be reduced more than once.

It is proposed to amend clause (a) of the aforesaid subsection (1A) so as to provide that in case a domestic company receives any dividend from any of its subsidiary during the financial year and where such subsidiary -

a. is a domestic company, the subsidiary has paid tax, if any payable, on such dividend ; or

b. is a foreign company, the tax is payable by the domestic company under section 115BBD, on such dividend, the dividend received from such subsidiary during the financial year shall be reduced.

The above amendment shall be effective from 1st June 2013.

Footnotes

* Legal intern

1 Section 115-0(1A)

2 Section 14A.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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