Amendments in Provisions Related to Dividend Taxation in India

With the advent of Financial Year 2020-21, dividend taxation in India has completely gone upside-down. The new provisions have again asked the recipient of dividend to pay taxes instead of the company who was distributing the dividends.

The changes in the Income tax law which brought the above change are as under:

  • Dividend Distribution Tax (DDT) has been scrapped.
  • Dividend has been put to tax in the hands of shareholders.
  • Exemption limit of upto Rs. 10 lacs dividend has been removed.
  • Surcharge on dividends has been capped at 15%.
  • Interest expense against dividend income has been capped at 20% of dividend income.
  • Dividend received on or after 1st April 2020 on which DDT has already been paid is not liable to tax again.

Another major change in addition to the above is re-introduction of Tax Deducted at Source (TDS) or Withholding tax (WHT) on Dividends.

Residential status

Type of shareholder

Other conditions

Base rate (%)

Surcharge (%)

HEC (%)

Effective rate of TDS (%)

Resident

Government/ RBI/ Corporation under central Act/ Mutual Fund

Copy of PAN along-with declaration that it holds beneficial interest in shares owned by it

       –  

       –  

       –  

       –  

LIC/ GIC/ any other insurer

Copy of PAN along-with declaration that it holds beneficial interest in shares owned by it

       –  

       –  

       –  

       –  

Any other

Less than 5,000

       –  

       –  

       –  

       –  

More than 5,000

Form 15G/H

       –  

       –  

       –  

       –  

PAN

7.5

       –  

       –  

7.500

No PAN

20

       –  

       –  

20.000

Non-Resident

Any

Dividends in respect of bonds or Global Depository Receipts (GDRs)2

10

       * 

4

10.400

FIIs/ FPIs

       –  

20

       * 

4

20.800

Company

upto 1 cr

20

       –  

4

20.800

1 cr – 10 cr

20

2

4

21.216

exceeds 10 cr

20

5

4

21.840

Other than the above (including NRIs and others)

upto 50 lacs

20

–  

4

20.800

50 lacs – 1 cr

20

10

4

22.880

exceeds 1 cr

20

15

4

23.920

 

*The rates of surcharge are applicable on all the non-residents (depending on their income) irrespective of the type of assessee. Accordingly, rate of surcharge for FIIs/ FPIs and dividends in respect of GDRs will be dependent on the type of shareholder i.e. company or non-company.

Basis the above one may note that the rates of TDS will be varying from 0% to 23.92%.

However, the above-mentioned rates are based on the provisions of the Income tax Act only i.e. before considering any benefit available under the Double Taxation Avoidance Agreement (DTAA or tax treaty) of the country of residence of the shareholder. Where the shareholder is entitled and is willing to claim tax treaty benefits, it will be required to submit the following documents with the company, before it distributes the dividend:

  • Tax Residency Certificate (TRC) issued by tax authorities of country of residence
  • Form 10F duly executed in the prescribed format
  • No PE declaration
  • PAN card copy

After obtaining and validating the above documents, the companies need to analyze the provisions of the India’s DTAA with the country of residence of the shareholder along-with the recently introduced provisions of Multi-lateral Instrument (MLI) to conclude the final rate of TDS. However, even after the above TDS, the non-resident shareholder will not be spared. In case TDS is computed in accordance with the DTAA provisions, the non-resident shareholder will also be required to file its income tax return in India as per the provisions of the Indian Income tax Act.

In addition to the above compliance burden, every such company is also required to file a separate Form 15CA/CB for each of its shareholders whom its paying the dividend if the shareholder is a non-resident.

Author: Ruchika Gupta, Manager-Direct Tax, AKGVG & Associates

This content is meant for information only and should not be considered as an advice or legal  opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.

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