Dividend and Income Distribution Tax

     Section 115-O of the Act provides that a domestic company shall be liable for payment of additional tax at the rate of 15 percent. on any amount declared, distributed or paid by way of dividends to its shareholders. This tax on distributed profits is final tax in respect of the amount declared, distributed or paid as dividends and no credit in respect of it can be claimed by the company or the shareholder.

     Section 115 R of the Act similarly provides for levy of additional income-tax in respect of income distributed by the mutual funds to its investors at the rates provided.

     Prior to introduction of dividend distribution tax (DDT), the dividends were taxable in the hands of the shareholder. The gross amount of dividend representing the distributable surplus was taxable, and the tax on this amount was paid by the shareholder at the applicable rate which varied from 0 to 30%. However, after the introduction of the DDT, a lower rate of 15% is currently applicable but this rate is being applied on the amount paid as dividend after reduction of distribution tax by the company.   Therefore, the tax is computed with reference to the net amount. Similar case is there when income is distributed by mutual funds.

     Due to difference in the base of the income distributed or the dividend on which the distribution tax is calculated, the effective tax rate is lower than the rate provided in the respective sections.

     In order to ensure that tax is levied on proper base, the amount of distributable income and the dividends which are actually received by the unit holder of mutual fund or shareholders of the domestic company need to be grossed up for the purpose of computing the additional tax.

Therefore, it is proposed to amend section 115-O in order to provide that for the purposes of determining the tax on distributed profits payable in accordance with the section 115-O, any amount by way of dividends referred to in sub-section (1) of the said section, as reduced by the amount referred to in sub-section (1A) [referred to as 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.

     Thus, where the amount of dividend paid or distributed by a company is ₹ 85, then DDT under the amended provision would be calculated as follows:

     Dividend amount distributed = ₹ 85

     Increase by ₹ 15 [i.e. (85*0.15)/(1-0.15)]

     Increased amount = ₹ 100

     DDT @ 15% of ₹ 100 = ₹ 15

     Tax payable u/s 115-O is ₹ 15

     Dividend distributed to shareholders = ₹ 85

     Similarly, it is proposed to amend section 115R to provide that for the purposes of determining the additional income-tax payable in accordance with sub-section (2) of the said section, the amount of distributed income shall be increased to such amount as would, after reduction of the additional income-tax on such increased amount at the rate specified in sub-section (2), be equal to the amount of income distributed by the Mutual Fund.

     These amendments will take effect from 1st October, 2014.

[Clauses 40 & 41]

Grossing up of dividend tax: distributed amounts must be increased so tax on the grossed amount nets to the paid dividend. Amendments require grossing-up of dividends and mutual fund distributed income so that the tax is computed on a pre-tax amount which, after reduction by the statutory distribution tax rate, equals the net amount actually paid; Section 115-O is revised for company dividends and Section 115R for mutual fund distributions, with both changes effective from 1 October 2014.