Abolition of Dividend Distribution Tax – Economics

Table of Contents

CURRENT AFFAIR

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.

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.

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.

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.