Section 115-O of the Income-tax Act, 1961, which casts an obligation on companies to pay DDT, has been amended, and provisions have been made beneficial to assesses.
By Shshank Saurav
In September, finance minister Nirmala Sitharaman announced a major tax cut for corporates, for which the estimated revenue loss is Rs 1.45 trillion. Data released by the CBDT based on tax collection till September 2019 (after second instalment due date for advance tax) shows that income tax receipts increased by a mere 4.7% as against 17.5% projected in the Budget. This is worrying, because it doesn’t include the impact of tax cuts that were announced after due date for paying second instalment of advance tax. There is a similar trend in indirect tax collection, where tax mobilisation has slowed down due to decline in consumption. The government is struggling to meet fiscal deficit targets amid growth slowdown, and cannot expect tax buoyancy in the coming period to improve the situation.
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Indian corporates are now demanding to abolish the dividend distribution tax (DDT or CDT) on the pretext of double taxation. DDT is paid by a domestic company that declares dividend. It is necessary to understand the mechanism of taxation and the rationale behind imposing DDT before concluding it as double taxation for the taxpayer.
Section 115-O of the Income-tax Act, 1961, which casts an obligation on companies to pay DDT, has been amended, and provisions have been made beneficial to assesses. When DDT was introduced in the 1997 Budget, Section 10(34)—Section 10(33) at that time—was also inserted in the Act; it provided that dividend received by a person shall be exempt from taxation. DDT ensured due taxes are collected at source stage, notwithstanding the tax status of the person receiving such dividend. Taxability of dividend has changed; in the 2008 Budget, the government allowed domestic firms to offset the amount of dividend got from subsidiaries while computing DDT liability. The 2016 Budget took away some benefits enjoyed by taxpayers, and Section 10(34) of the Act was amended and the new Section 115BBDA inserted. From 2016, dividend income over Rs 10 lakh is taxable at the rate of 10%. Few years ago, the government introduced tax on buyback of securities, when companies started taking share buyback route to avoid DDT.
DDT was introduced to plough back the profit for investment and expansion. Gross fixed capital formation (GFCF) as percentage of GDP has declined from 34.1% in 2011-12 to 29% in 2017-18. There is a steep decline in gross capital formation (GCF) ratio also. The private sector has not announced any major investment after the recent corporate tax cut and, therefore, abolishing DDT at this point of time may prove to be counter-effective. Up to a certain extent, DDT restrains companies from distributing the retained surplus by way of taxation at the level of company itself, and undistributed profit is used by companies for expansion purpose. Abolishing DDT will not only impact tax collection, but will also affect investment cycle and, therefore, it makes no economic sense for such a move in the current scenario.
So far as double taxation is concerned, it must be appreciated that dividend income in the hands of small taxpayers is exempt from tax. Dividend income over Rs 10 lakh in a year is taxed at a concessional rate of 10%. It may be argued that retained surplus belongs to shareholders of the company, and for all practical purposes DDT is in the nature of tax on shareholder’s income that is withheld at source by the payer. The element of double taxation has been taken care of by allowing offset of dividend received from a subsidiary while determining DDT liability of parent entity. If there is double taxation in the entire chain, then it is on the person (other than company, charitable trust) who receives dividend over Rs 10 lakh in a year. DDT ensures a shareholder having a large stake in a company doesn’t go untaxed, and the threshold of Rs 10 lakh covers only those people who have large portfolios.
The government has already provided major relief to the corporates by reducing tax rates, and now it is time for industry to respond positively and revive the investment cycle. Usually, public expenditure is increased in case of economic slowdown and, therefore, asking for another relief is unjustified, given that industry is yet to respond positively on the concessions that were given a few months ago.
The author is a chartered accountant