Dividend income no

longer a sweet exempt

pie!!

Finance Act, 1997 bought about a radical change in the system of taxing distribution of dividends by inserting section 115-O
of the Income-tax Act, 1961 ('Act'). The tax on dividend was over and above the taxes paid by the company on its profits.
This amendment was often criticised as it amounted to double taxation in the hands of the company and again in the hands
of shareholders.

Dividend distribution tax ('DDT')was abolished in the year 2002 and the budget for the financial year 2002-2003 proposed
the removal of DDT by bringing back the regime of dividends being taxed in the hands of the shareholders/ recipients.

However, in line with the view that it is easier to collect tax at a single point i.e. from the company rather than individual
shareholders, the Finance Act, 2003 re-introduced section 115-O of the Act and taxed the amounts so declared, distributed
or paid by way of dividend in the hands of the company. Consequently, deduction under section 80L (available to
individuals) was discontinued. Also, dividend liable to DDT under section 115-O of the Act was exempted from tax in the
hands of shareholders pursuant to section 10(34) of the Act.

At present, company declaring dividend [as defined in section 2(22) of the Act] is liable to pay DDT at the rate of 15% on
the amount declared as dividend. Dividend income is exempt in the hands of shareholders under section 10(34) of the Act.
Dividend distribution tax is not applicable on distribution of dividend under section 2(22)(e) of the Act. Dividend under
section 2(22)(e) of the Act is subject to withholding under section 194 of the Act at the rate of 10% and is taxable in the
hands of shareholders.

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Budget 2016 proposal relating to taxation of dividend income
The Finance Bill, 2016('Finance Bill') proposes to amend the exemption provided in section 10(34) of the Act by
excluding resident individual, Hindu undivided family ('HUF') or a firm having income from dividend exceeding
Rs. 10 lakhs.
Finance Bill intends to introduce the said exclusion from exemption under section 10(34) of the Act by
introducing section 115BBDA.
The legislative intent of introducing taxation on dividend is to remove vertical inequality amongst the tax
payers i.e. those who have high dividend income are subjected to tax only at the rate of 15% whereas such
income in their hands would have been chargeable to tax at the rate of 30%.
1. Dividend income received from a domestic company by resident individual, Hindu undivided family ('HUF')
or a firm exceeding Rs. 10 lakhs shall be subject to tax in the hands of recipient.
2. The amount of income-tax calculated on the income by way of aforementioned dividends shall be taxed at
the rate of 10% (plus surcharge and cess).
3. No deduction in respect of any expenditure or allowance or set off of loss shall be allowed to the assessee
under any provision of the Act in computing the income by way of dividends.
4. For the purpose of section 115BBDA, "dividends" shall have the same meaning as is given to "dividend" in
section 2(22) of the Act but shall not include 2(22)(e) of the Act.

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Our observations
The proposal seems to be contrary to the intention of introducing section 115-O of the Act. Also, post
legislation of the aforementioned proposal, the effective base tax paid on dividend income for specified
class of shareholders shall be 25% (i.e. 15% dividend distribution tax + 10% dividend tax).
Further, it may be relevant that the provision could elaborate as to the meaning of an 'individual' as under
the Act, some assesses may be considered /assessed as individuals.

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