Table of Contents
CURRENT AFFAIR
- Budget 2020
- Big relief for corporates and non-resident shareholders.
DDT
- Dividend is a return given by a company to its shareholders out of the profits earned by the company in a particular year.
- Dividend constitutes income in the hands of the shareholders which ideally should be subject to income tax.
- However, the Indian income tax laws provide for an exemption of the dividend income received from Indian companies by the investors.
- DDT is levied on any domestic company which is declaring/distributing dividend and is paid at the rate on the gross amount of dividend.
CURRENT REGULATIONS
- Section 14A provides that any expense concerning income not forming part of total income would not be allowed as deduction.
- Presently, the dividend income is not taxable in the hands of shareholder and does not form part of total income.
- Section 56 charges income tax on the dividend.
- Section 57 allows certain deductions while computing income from other sources.
- All expenses incurred wholly and exclusively to earn income taxable under Section 56 are allowed as deduction.
BUDGET PROPOSAL
- It proposes a provison to Section 57 that states that no deduction shall be allowed against dividend income other than interest expenses.
- The deduction on account of interest will be restricted to 20% of the dividend income.
- The cap of 20% is based on the amount of income earned and offered to tax in the previous year.
- Hence, in case, no dividend income is earned in a year even though the assessee incurs interest expenditure or fee on investment managers, she cannot claim any deduction.
- The amendments change the regime of taxation from being net to gross.
- Presently, expenses are allowed to be deducted as per Section 57, and it has resulted in a massive leakage of revenue.
How income is taxed now?
- Income may be interpreted in a wide manner to include receipts, windfalls and gifts.
- When the income like profit is taxed, the mechanism provided to tax it would allow for a deduction of expenses.
- Certain incomes like royalty, fee for technical service, etc, are subject to taxation on a gross basis.
- In case of income from house property, there is a cap on deduction towards interest paid on borrowed capital.
- Where the assessee claims that dividend is business income, it may be possible to claim all expenses regarding it.
- However, the debate of whether dividend can ever constitute business income is already before the courts.
IMPACT
- Increase the burden of resident shareholders, especially those falling in higher tax brackets.
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