FAQ regarding Dividend Distribution Tax

FAQ regarding Dividend Distribution Tax : Dividend distribution tax is the tax levied by the Indian Government on companies according to the dividend paid to a company’s investors. At present the dividend distribution tax is 15%, according to the Union Budget 2007, India. As per existing tax provisions, income from dividends is tax free in the hands of the investor. Further the dividends from domestic companies are tax-exempt, dividend from foreign companies are taxable in hands of investor.

FAQ regarding Dividend Distribution Tax

FAQ regarding Dividend Distribution Tax : As per the provisions contained in section 115-O (1) of the Income tax Act, 1961 any amount declared, distributed or paid by domestic company by way of dividends shall be charged to additional income tax at the rate of 15 per cent.
Dividend for this purpose includes interim dividend and it can be paid out of either current or accumulated profits.

Calculation of dividend distribution tax :

(1) In case of domestic companies :

The Domestic Company is liable to pay DDT at 16.995 percent ( inclusive of surcharge and education cess) on such dividends.and tax at this effective rate of 16.995% is paid on the amount of dividend paid/income distributed. The Finance (No.2) Bill, 2014 proposes to gross up the dividend paid with the income distributed for computingthe tax liability on account of dividend distribution tax. With the grossing up, the effective tax rate will be 20.47%, with the result, there will be an additional tax liability of 3.475%.

(2) In case of mutual funds :

Mutual Fund other than an equity oriented Mutual Fund is liable to pay income distribution tax as follows:

(a)28.325 % on income distributed to any person being an individual ora HUF by a money market Mutual Fund or a liquid fund

(b)33.99 percent on income distributed to any other person by a money market Mutual Fund or a liquid fund

(C)28.325 % of income distributed to any person being an individual or a HUF by a debt fund other than a money market mutual fund or a liquid fund;

(D)33.99 % on income distributed to any other person by a debt fund other than a money market mutual fund or a liquid fund; and

(e)5.665 percent on income distributed to non-resident or foreign company by Mutual Fund under an Infrastructure Debt scheme.

***All the above rates are inclusive of applicable rate of surcharge and education cess.

FAQ regarding Dividend Distribution Tax

FAQ regarding Dividend Distribution Tax : This FAQ on Dividend Distribution Tax has been issued by the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI). The purpose of this FAQ is to illustrate and to assist in clarifying the requirements regarding treatment of Dividend Distribution Tax

Question: What are the presentation requirements as per Ind AS for dividend and dividend distribution tax thereon, if an entity has issued certain financial instruments that are classified as debt as per the provisions of Ind AS 32, Financial Instruments: Presentation? What would be the presentation requirements in this regard, if the financial instruments issued are classified as equity or if these are compound financial instruments and bifurcated into debt and equity?

Response: With regard to the recognition of dividend declared on financial instruments, paragraphs 35 and 36 of Ind AS 32 reproduced hereunder may be noted:

1) ‘‘35 Interest, dividends, losses and gains relating to a financial instrument or a component that is a financial liability shall be recognised as income or expense in profit or loss. Distributions to holders of an equity instrument shall be recognised by the entity directly in equity. Transaction costs of an equity transaction shall be accounted for as a deduction from equity.

The classification of a financial instrument as a financial liability or an equity instrument determines whether interest, dividends, losses and gains relating to that instrument are recognised as income or expense in profit or loss. Thus, dividend payments on shares wholly recognised as liabilities are recognised as expenses in the same way as interest on a bond. Similarly, gains and losses associated with redemptions or refinancings of financial liabilities are recognised in profit or loss, whereas redemptions or refinancings of equity instruments are recognised as changes in equity. Changes in the fair value of an equity instrument are not recognised in the financial statements.’’
52B In the circumstances described in paragraph 52A, the income tax consequences of dividends are recognised when a liability to pay the dividend is recognised. The income tax consequences of dividends are more directly linked to past transactions or events than to distributions to owners.
“65A When an entity pays dividends to its shareholders, it may be required to pay a portion of the dividends to taxation authorities on behalf of shareholders. In many jurisdictions, this amount is referred to as a withholding tax. Such an amount paid or payable to taxation authorities is charged to equity as a part of the dividends.”

2) ‘‘61A Current tax and deferred tax shall be recognised outside profit or loss if the tax relates to items that are recognised, in the same or a different period, outside profit or loss. Therefore, current tax and deferred tax that relates to items that are recognised, in the same or a different period:

in other comprehensive income, shall be recognised in other comprehensive income.

directly in equity, shall be recognised directly in equity.’’

In view of the above, presentation of DDT paid on the dividends should be consistent with the presentation of the transaction that creates those income tax consequences. Therefore, DDT should be charged to profit or loss if the dividend itself is charged to profit or loss. If the dividend is recognised in equity, the presentation of DDT should be consistent with the presentation of the dividend, i.e., to be recognised in equity.