Section 115O of the Income Tax Act, 1961 deals with the distribution of profits by domestic companies. This section was introduced in the Finance Act, 2003 and has undergone amendments from time to time. Let us dive deeper into the various aspects of Section 115O of the Income Tax Act.
Overview of Section 115O:
Section 115O of the Income Tax Act, 1961 is applicable to domestic companies that have declared or distributed dividends. The section states that domestic companies are required to pay a dividend distribution tax (DDT) on the amount of dividend distributed to its shareholders. The DDT is paid by the company and not by the shareholders.
Dividend Distribution Tax (DDT):
The DDT is a tax that is levied on the amount of dividend distributed by domestic companies. The current rate of DDT is 15%, as per the Finance Act, 2020. The DDT is payable by the company within 14 days from the date of declaration, distribution or payment of dividend, whichever is earlier.
Exemptions from Dividend Distribution Tax:
Dividend distributed by certain companies is exempt from the DDT. These companies include:
- Mutual funds: Dividend distributed by mutual funds to their unit holders is exempt from the DDT.
- Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs): Dividend distributed by InvITs and REITs is exempt from the DDT.
- Dividend distributed by Indian companies to Foreign Companies: Dividend distributed by Indian companies to foreign companies is also exempt from DDT, provided the foreign company is either:
a. Located in a country with which India has entered into a Double Taxation Avoidance Agreement (DTAA), or
b. The dividend is subject to tax in the foreign company’s country of residence.
Consequences of non-payment of DDT:
If a company fails to pay the DDT within the prescribed time limit, it will be liable to pay interest at the rate of 1% per month or part thereof until the tax is paid. In addition, a penalty of equal to the amount of DDT that remains unpaid may also be levied.
Purpose of Dividend Distribution Tax (DDT):
The purpose of DDT is to tax the company on the profits distributed as dividends, rather than taxing the individual shareholders who receive the dividends. This ensures that the government receives a share of the company’s profits, which can then be used for various developmental purposes.
Calculation of Dividend Distribution Tax:
The DDT is calculated as a percentage of the gross amount of dividend declared or distributed by the company. The current rate of DDT is 15%. So, if a company declares a dividend of Rs. 1,00,000, it would be required to pay a DDT of Rs. 15,000 (15% of Rs. 1,00,000).
Impact of DDT on Shareholders:
DDT is paid by the company and not by the shareholders. However, the DDT does impact the amount of dividend that the shareholders receive. Since the DDT is deducted from the gross amount of dividend, the net amount of dividend that the shareholders receive is lower than the gross amount declared by the company.
For example, if a company declares a dividend of Rs. 1,00,000 and pays a DDT of Rs. 15,000, the net amount of dividend that the shareholders receive would be Rs. 85,000.
Amendments to Section 115O:
Over the years, Section 115O has undergone several amendments to keep up with the changing economic and business environment. One of the major amendments was introduced in the Finance Act, 2016, which provided for a higher rate of DDT (up to 30%) for dividend declared or distributed by companies whose income exceeded Rs. 10 crore in the previous year.
The Finance Act, 2020 also introduced certain amendments to Section 115O, including the reduction in the rate of DDT from 20% to 15% for dividends declared or distributed on or after 1st April 2020.
Impact of DDT on Small Shareholders:
The DDT has a higher impact on small shareholders as compared to large shareholders. This is because the DDT is levied on the gross amount of dividend declared or distributed by the company, which is the same for all shareholders irrespective of their shareholding. So, small shareholders who receive a relatively lower amount of dividend may end up paying a higher percentage of DDT as compared to large shareholders.
Dividend received by Foreign Companies:
As mentioned earlier, dividend distributed by Indian companies to foreign companies is exempt from DDT, provided the foreign company is located in a country with which India has entered into a Double Taxation Avoidance Agreement (DTAA), or the dividend is subject to tax in the foreign company’s country of residence. However, if the foreign company is located in a tax haven or a jurisdiction with a low tax rate, then the Indian company may be required to pay a higher rate of tax under the General Anti-Avoidance Rules (GAAR).
Implications of Abolishing DDT:
There have been discussions regarding the abolition of DDT, which would mean that companies would no longer be required to pay tax on the profits distributed as dividends. While this may benefit shareholders as they would receive a higher net amount of dividend, it would also lead to a loss of revenue for the government. In addition, it may also lead to an increase in the tax liability of individual shareholders, as they would be required to pay tax on the dividends received.
Conclusion:
Section 115O of the Income Tax Act, 1961 plays a crucial role in the taxation of domestic companies in India. It ensures that the government receives its fair share of taxes on the profits distributed by companies to their shareholders. The exemptions provided under this section encourage investment in certain sectors and also promote the ease of doing business in India. It is important for companies to comply with the provisions of this section to avoid penalties and interest on non-payment of DDT.
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Frequently Asked Questions (FAQs)
- What is Section 115O of the Income Tax Act?
Section 115O of the Income Tax Act is a provision that governs the taxation of dividend distribution by domestic companies in India.
2. Who is liable to pay Dividend Distribution Tax (DDT) under Section 115O?
The company that declares or distributes dividends is liable to pay DDT under Section 115O.
3. What is the current rate of DDT under Section 115O?
The current rate of DDT under Section 115O is 15%.
4. Is DDT levied on all types of dividends?
No, DDT is only levied on dividends declared or distributed by domestic companies in India. Dividends declared by foreign companies are exempt from DDT, subject to certain conditions.
5. Are there any exemptions from DDT under Section 115O?
Yes, certain types of companies such as infrastructure companies, power companies, and companies engaged in the development of special economic zones (SEZs) are exempt from DDT.
6. How is DDT calculated under Section 115O?
DDT is calculated as a percentage of the gross amount of dividend declared or distributed by the company.
7. Does DDT impact the net amount of dividend received by shareholders?
Yes, DDT impacts the net amount of dividend received by shareholders, as it is deducted from the gross amount of dividend declared or distributed by the company.
8. What are the implications of abolishing DDT?
If DDT is abolished, companies would no longer be required to pay tax on the profits distributed as dividends. While this may benefit shareholders, it would also lead to a loss of revenue for the government and may increase the tax liability of individual shareholders.
9. What are the penalties for non-payment of DDT?
If a company fails to pay DDT, it may be liable to pay penalties and interest under the Income Tax Act.
10. Can companies claim a refund of DDT paid under Section 115O?
No, companies cannot claim a refund of DDT paid under Section 115O. However, if the company is a tax-exempt entity, it may be able to claim a refund of the tax paid on behalf of its shareholders.
