Application of 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 sub-clause (e) of clause (22) of section of 2 the Act is taxed in the hands of the recipient at the applicable marginal rate. The taxability of deemed dividend in the hands of recipient has posed serious problem of the collection of the tax liability and has also been the subject matter of extensive litigation.

With a view to bringing clarity and certainty in the taxation of deemed dividends, it is proposed to delete the Explanation to Chapter XII-D occurring after section 115Q of the Act so as to bring deemed dividends also under the scope of dividend distribution tax under section 115-O. Further, 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 relating to imposition of dividend distribution tax on deemed dividend will apply to transactions referred to in sub-clause (e) of clause (22) of section 2 of the Act undertaken on or after 1st April, 2018.

[Clause 38 & 39]

Dividend distribution tax extended to deemed dividends, making companies liable for tax and collection on disguised payouts. Amendment brings deemed dividends within the dividend distribution tax regime by deleting the Explanation to Chapter XII-D so that distributions referred to in sub clause (e) of clause (22) of section 2 are subject to dividend distribution tax under section 115 O. Such deemed dividends will be taxed at 30 per cent without grossing up, with the amendment applying prospectively to transactions undertaken on or after the commencement date specified by the amendment.