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Accounting for Corporate Dividend Tax

Accounting for Corporate Dividend Tax

Under Finance Act, 1997 a special provision relating to tax on profits distributed by companies to its shareholders was introduced under section 115O and 115Q of Income tax act, 1961. Such tax is known as “Corporate Dividend Tax”.

CDT is a special tax in addition to income tax act payable on dividend declared, proposed or paid by the company. The expression “dividend” is defined in section 2(22) of income tax act but shall not include clause (e) of such section.

A guidance note on accounting for corporate dividend tax was issued in 1997 clarifying the accounting aspects of it. It defines certain salient features of CDT which are as follows: –

  • Dividend chargeable to CDT may be paid either out of current profits or accumulated profits.
  • CDT rate is 10%
  • CDT shall be payable irrespective whether income tax is payable by company or not.
  • CDT is payable to central government within 14 days of –

    1. Declaration of dividend, or
    2. Distribution of dividend, or
    3. Payment of dividend, whichever is earliest.
  • CDT paid shall be treated as final payment of tax on dividend and no credit shall be claimed by the company against it.

Disclosure and presentation of CDT in Financial Statement

Statement of profit and loss, as per part II of schedule III, is been divided into 2 parts: –

Part a: – also known as “above the line” which contains information which is required to arrive at current year’s profits.

Part b: – also known as “below the line” which involves appropriation of profits.

Dividends are disclosed in “below the line” part while provision for income tax is disclosed in “above the line”. Now question arises where CDT should be disclosed.

Guidance note gives clarification regarding this: –

“The liability in respect of CDT arises only if the profits are distributed as dividends whereas the normal income-tax liability arises on the earning of the taxable profits. Since the CDT liability relates to distribution of profits as dividends which are disclosed ‘below the line’, it is appropriate that the liability in respect of CDT should also be disclosed ‘below the line’ as a separate item. It is felt that such a disclosure would give a proper picture regarding payments involved with reference to dividends. “

Conclusion

  1. CDT liability should be recognised in accounts of the same financial year in which the dividend concerned is recognised
  2. Provision for Corporate Dividend Tax should be disclosed separately under the head “Provisions” in the balance sheet
  3. CDT liability should be disclosed “below the line” as follows: –

Dividend                                            xxxxxx

Corporate dividend tax                  xxxxxx                                  xxxxxx

Accounting for Corporate Dividend Tax

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