By Neha Malhotra
With abolition of Dividend Distribution Tax (DDT), dividend declared/ distributed on or following April 1, 2020 is taxable in the hands of the recipient shareholders. Transitional dividends (i.e. declared ahead of the reduce-off date and distributed later), shall stay topic to DDT. Restoration of the classical program has led to revival of corresponding enabling provisions that permit deduction of expenditures, deduction of tax at supply (TDS), treaty relief for non-residents, and so on.
Compliance obligation on shareholders
Dividend revenue from shares held as investment shall be taxable below head ‘other sources’ in the hands of recipient shareholders at applicable slab prices. As per the provisions of the Income Tax Act, final dividend is taxable in the year in which it is declared, distributed or paid, whichever is earlier and interim dividend is taxable in the year when such dividend is received by the shareholders.
For resident shareholders, dividends and revenue from mutual funds is topic to TDS at the price of 10%, if the quantity received by the person exceeds Rs 5,000 in a year. The tax so deducted shall be accessible as credit from the final tax liability of the taxpayer, at the time of filing of return of revenue. For non-resident shareholders, tax is necessary to be withheld at the price of 20%, topic to valuable tax treaty price, if accessible.
However, non-resident shareholders would be necessary to furnish many documents such as Tax Residency Certificate, Form 10F, declaration of valuable ownership, and so on. in order to claim tax treaty rewards. Else, the Indian enterprise distributing dividend, might deduct tax devoid of accounting for the valuable treaty price. In such a case, reduced tax treaty price shall have to be claimed by filing tax return in India.
Pertinently, non-resident shareholders are exempted from filing a tax return if their total revenue consists of dividend revenue or any prescribed passive revenue (like interest) and tax has been withheld at price specified in the Act. Therefore, only if a reduced tax treaty price is claimed, non-residents shall have to furnish a return of revenue disclosing dividend revenue and tax deducted thereon.
Deduction of expenditures
As per the new provisions, a taxpayer might claim deduction of interest expenditure that has been incurred by him to earn the dividend revenue, topic to the limit of 20% of such revenue. No other expense, like commission or remuneration paid to banker/ broker shall be permitted to be claimed.
Further, revenue tax provisions need taxpayers to spend advance tax instalments, if estimated tax liability exceeds Rs 10,000 in the relevant year. In the occasion of non-payment/ brief payment, interest at prescribed prices is charged on the quantity of shortfall. However, recognising the nature of dividend revenue and the probable issues in correct determination of advance tax thereon, the law has supplied that if shortfall in payment of advance tax is on account of dividend revenue, no interest would be levied, supplied the taxpayer pays complete tax in subsequent advance tax instalments.
What to do?
With the finish of the monetary year on March 31, 2021, it is time for filing of revenue tax returns ahead of the finish of July this year. In order to ease compliance, facts of dividend revenue will now be pre-filled in Income Tax Return Forms and can be downloaded from the revenue tax portal.
The writer is director, Nangia Andersen India. With inputs from Vasudha Arora