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DIVIDEND DISTRIBUTION TAX UNDER DIRECT TAXES CODE

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DIVIDEND DISTRIBUTION TAX UNDER DIRECT TAXES CODE
By: Mr. M. GOVINDARAJAN
November 19, 2010

DIVIDED DISTRIBUTED OR PAID BY A COMPANY:

Sec.314 (81) (1) of the Direct Taxes Code provides that the term 'dividend distributed or paid by a company includes-

a)      any distribution by a company of accumulated profits, whether capitalized or not, if such distribution entails the release by the company its shareholders of all or any part of the assets of the company;

b)      any distribution to its shareholders by a company of debentures or debenture-stock, or deposit certificates in any form, whether with or without interest, and any distribution to shareholders of its preference shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalized or not;

c)      any distribution made to the shareholders (other than the share holders not entitled in the event of liquidation to participate in the surplus asses) of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalized or not;

d)      any distribution to its shareholders (other than shareholders not entitled in the event of liquidation to participate in the surplus assets) by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits, whether such accumulated profits have been capitalized or not; and

e)      any payment by a closely-held company, to the extent of accumulated profits, if such payment is-

o       by way of advance or loan to a shareholder being the beneficial owner of equity shares holding not less than 10% of the voting power; or

o       by way of advance or loan to any Hindu undivided family, or a firm, or an association of persons, or a body of individuals, or a company in which such shareholder is a member or a partner or a shareholders, and in which he has a substantial interest; or

o       to any person on behalf, or for the individual benefit, of such shareholder

Sec. 314(81)(2) provides that the dividend distributed by a company does not include-

any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company;

  • any divided paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of  Sec.314(81)(1)(e) to the extent to which it is set off;
  • any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of Section 77A of the Companies Act, 1956; and
  • any distribution of shares pursuance to a demerger by the resulting company to the shareholders  of the demerged company (whether or not there is a reduction of capital in the demerged company).
  • DIVIDEND INCOME:

     Sec. 7 of the Direct Taxes Code provides that for the purpose of inclusion in the total income of an assessee any dividend declared, distributed or paid by a company within the meaning of item (a) or item (b) or item (c) or item (d) or item (e) of sub clause (1) of Section 314 shall be deemed to be the income of the financial year in which it is so declared, distributed or paid as the case may be.  Any interim dividend shall be deemed to be the income of the financial year in which the amount of such dividend is unconditionally made available by the company to the member who is entitled to it.

    DIVIDEND DISTRIBUTION TAX:

     Sec. 314 (82) defines 'dividend distribution tax' as the tax chargeable under Section 109.  Dividend distribution tax is dealt with in Chapter VII of Part B of Direct Taxes Code.  Sec. 109 provides that every domestic company shall be liable to pay tax on any amount of dividend declared, distributed or paid, whether interim or otherwise, to its shareholders, whether out of current or accumulated profits.  The said amount shall be reduced by the amount of dividend if any received by the domestic company during the financial year if such dividend is received from its subsidiary and the subsidiary has paid tax under this section on such dividend.  A company shall be a subsidiary of another company if such other company holds more than fifty per cent of nominal value of the equity share capital of the company.  The term 'dividend' for the purpose of this section shall not include any payment referred to in item (e) of sub clause (1) of clause (81) of Section 314.

    The tax rate is 15% on the amount of dividend declared, distributed or paid by a domestic company.

    PAYMENT OF TAX:

    The domestic company or the principal officer of such company responsible for making payment of the dividend, as the case may be, shall be liable to pay the tax on dividend to the credit of the Central Government within a period of fourteen days from the date of declaration, distribution or payment of such dividend, whichever is earliest.  It is to be noted that no deduction under any other provision of this Code shall be allowed to the domestic company or a shareholder in respect of the dividend charged to tax or the tax thereon.  The Code further provides that the tax on dividend so paid by the domestic company shall be treated as the final payment of tax in respect of the dividend declared, distributed or paid and no further credit shall be claimed by the domestic company or by any other person in respect of the tax so paid.

    FAILURE TO PAY TAX:

    If the tax payment has not been made in accordance with this provision, then the domestic company or the principal officer of such company shall be deemed to be an assessee in default in respect of the tax payable by it or him and the provisions of this Code relating to the collection and recovery of tax shall apply.

    If the tax is not paid within the stipulated period either wholly or partly then simple interest is liable to be paid @ 1% for every month on the amount of such tax for the period beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid. 

    MANDATORY PAYMENT:

    Notwithstanding that no income tax is payable by a domestic company on its total income computed in accordance with the provisions of Part A of the Code, the tax on dividend declared, distributed or paid under this section shall be payable by the company.

     
    By: Mr. M. GOVINDARAJAN - November 19, 2010
     
     
     

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