Deemed Dividend - Budget updates

• Widening of scope of accumulated profits for the purposes of dividend

Section 2 (22) defines “dividend” to include distribution of accumulated profits (whether capitalized or not) to its shareholders by a company. Explanation 2 to the said clause provides the definition of the term 'accumulated profits’ for the purposes of the said clause, as all profits of the company up to the date of distribution or payment or liquidation, subject to certain conditions.

Proposal to insert a new Explanation 2A in section 2(22) of the Act to widen the scope of the term 'accumulated profits' so as to provide that in the case of an amalgamated company, accumulated profits, whether capitalised or not, or losses as the case may be, shall be increased by the accumulated profits of the amalgamating company, whether capitalized or not, on the date of amalgamation.

This amendment will take effect from April 1, 2018 and will accordingly apply in relation to assessment year 2018-19 and subsequent assessment years.

• Dividend Distribution Tax to Deemed Dividend

At present dividend distributed by a domestic company is subject to dividend distribution tax payable by such company. However, deemed dividend under section 2(22)(e) the Act is taxed in the hands of the recipient at the applicable marginal rate.

Delete the Explanation to Chapter XII-D occurring after section 115Q of the Act is proposed so as to bring deemed dividends also under the scope of dividend distribution tax under section 115-O. Such deemed dividend is proposed to be taxed at the rate of 30 per cent (without grossing up) in order to prevent camouflaging dividend in various ways such as loans and advances.

This amendment will apply to transactions referred to in section 2(22)(e) of the Act undertaken on or after April 1, 2018.