Why Abolition of Dividend Distribution Tax is Necessary?

A dividend is a part or percentage of a company’s earnings distributed to shareholders of the company. A dividend distributions tax is imposed on profits distributed by Indian companies to their shareholders or investors for their investment and dividends, respectively. Before distributing dividends, the corporation is taxed under the requirements of the income tax statute. The Union Budget of India stated that the government proposes eliminating the dividend distribution tax on the dividends declared. This is because there were numerous reasons to abolish the Dividend Distribution Tax. At the same time, the impact of abolishing the Dividend Distribution Tax was great.

Much More About DDT

The Dividend Distribution Tax, or DDT, is a tax deducted at the source when a corporation distributes dividends. The dividend is a portion of its profits that it distributes to its shareholders. According to law, the Dividend Distribution Tax is imposed on the corporation rather than the receiving shareholder. However, if a shareholder obtains more than Rs. 10 lakh in dividend income in a financial year, he or she will be subject to an extra tax.

Reasons To Abolish The Dividend Distribution Tax

Many people have a very common question about why the abolition of the Dividend Distribution Tax is necessary. Some of them ask for reasons to abolish the Dividend Distribution Tax. The Dividend Distribution Tax (‘DDT’) was discontinued on April 1, 2020, and a withholding tax (‘WHT’) was implemented on dividend payments. As a result, dividends are now only taxable in the recipient’s hands. According to the Mauritius-India Double Tax Avoidance Agreement (‘DTAA’), an Indian company paying dividends to a Mauritius entity is required to withhold tax at source at a preferential rate of either 5% or 15%, provided that the Mauritius company is the beneficial owner of the dividends, is tax resident in Mauritius, and meets the limitation of benefits clause.

Both the Mauritian and Indian domestic tax rules leave the concept of beneficial ownership undefined. We’ve seen cases where the Indian tax authorities have taken a tough line and denied corporations treaty benefits. Beneficial ownership and tax residency status are determined on a case-by-case basis. The tax tribunal weighs many factors such as substance, decision-making, and commercial rationale before granting treaty benefits. As a result, if Mauritius firms want to take advantage of the favourable rates under the India-Mauritius DTAA, they must consider how the Indian tax authorities will evaluate their residence and beneficial ownership status. These were the reasons to abolish the Dividend Distribution Tax. This justifies why the abolition of the Dividend Distribution Tax is necessary.

Key Changes That Took Place After Abolishing The Dividend Distribution Tax?

Looking for the key changes that took after abolishing the Dividend Distribution tax? Well, there are a lot. According to the old regime of DDT, an Indian firm was required to pay a 20.555 per cent Dividend Distribution Tax on dividends paid to shareholders on or before March 31, 2020. There was no withholding tax on the dividends paid by the Indian firm, and they were tax-free in the hands of the recipients, whether they were a corporation, a passthrough, or an individual. Such dividends were also taxable at 10% in the case of certain Indian resident stockholders. But the new DDT regime states that an Indian company that pays dividends is no longer subject to DDT and should instead withhold tax at the source at the time of payment because the dividend receiver is now taxed. The withholding tax (‘WHT’) on dividends paid to resident shareholders is 10%, whereas the rate for non-resident shareholders is 20% under Indian domestic tax legislation.

Furthermore, to be eligible for treaty benefits under the DTAA described above, stockholders must be Mauritius tax residents and meet the limitation of benefits conditions. Otherwise, a 20% WHT rate (plus any surcharge and cess). So, these were the key changes that took after abolishing the Dividend Distribution Tax.

Conclusion

From the data mentioned above, we can conclude that the abolition of the Dividend Distribution Tax was very necessary. At the same time, the dividends are a percentage of profits paid out. It is paid to shareholders in proportion to the company’s performance. Interim and final dividends are the two sorts of dividends. The interim dividend is paid throughout the year, but the final payout is given only if the annual general meeting approves it. Also, the impact of abolishing the Dividend Distribution Tax was great as it justified the reasons to abolish the Dividend Distribution Tax.