The entry of Dividend Distribution Tax (DDT) in tax legislation has an interesting history.
Prior to FY 03-04, any dividend received by companies was taxed in the hands of the companies and subsequently dividend paid by these companies or MFs was also taxed in the hands of the investors. This was obviously a case of double taxation. There was a hue and cry against this in the media, including from yours sincerely. To stem these protests, the government played a clever ploy. It made the dividend tax-free in the hands of the recipients.
To recoup the loss it introduced Dividend Distribution Tax (DDT) at source; again a case of double taxation but surreptitious in nature, invisible to the shareholders. This DDT is in addition to the normal income tax payable.
The DDT acts in fact like TDS. If not, the tax authorities want it to be converted as such. Normally, the TDS is applied on the entire income earmarked to be paid and not the income actually received by the assessee. The case of DDT was different. The tax was applied on the income actually received by the shareholder or the unitholder. This situation has got changed now and DDT has virtually become TDS.
Of course, the dividend received by investors is tax-free. This is an eye wash. Clearly, the dividend received by an investor is essentially not tax-free. All investors, taxpayers or not, leave alone those in the 5% tax bracket, suffer this special DDT and no one, not even those whose income is well below the tax threshold can claim refund. Collecting tax from non-taxpayers is bad in principle. Fortunately, u/s 115R(2), DDT is not levied on equity-based funds of MFs, open-ended or close-ended.
In the case of debt-based schemes the rates are ridiculously high.
For individuals & HUFs, the DDT is charged @25% and with surcharge education cess, the rate works out at @29.6125%. For all other categories of taxpayers, the rate is 30% (= 35.535%).
FA14 w.e.f. 1.10.14, has inflicted one more injury. To understand its impact clearly, imagine that the MF desires to distribute `100 as dividend. Since the DDT is 29.6125%, it used to give `77.1530 to the unitholder and pay `22.8470 (= 29.6125% of `77.1530) as DDT. Now, the authorities have taken a stand that the DDT is applicable on the entire income earmarked to be paid and not the income actually received by the assessee. Consequently, since `100 is the amount earmarked as dividend to be paid, `29.6125 is the DDT. The investor receives only `70.3875. He suffers additional tax of `6.7655 (= 77.1530 – 70.3875).
Again, most unfortunately the DDT is not allowed as a rebate or deduction while computing the tax or taxable income of a shareholder or unitholder.
We were always advocating avoiding Dividend Schemes and embracing Growth Schemes of MFs because of the tax efficiency of Growth. Only some of our readers benefited. Now, in one fell swoop, the FM has forced the investors not to touch dividend even with a barge pole.
The investor in MF Schemes can adopt an excellent strategy to bypass this draconian DDT without losing an iota by way of returns on his investments. All that he has to do is to always opt for the growth option for the debt-based schemes. There is no DDT or TDS because there is no dividend on growth. Growth attracts tax @ 20% if the holding period is more than 3 years. Whatever amount of dividend the MF pays to investors of the Dividend option may be withdrawn by an investor in the Growth option by way of selling equivalent number of units. This method of ‘earning dividend’ is more tax-efficient since it bypasses the levy of DDT. And though it may seem prima facie to a lay investor that by selling units, one is depleting one’s capital, in actual fact it doesn’t work out so since the balance units have grown in value making the portfolio of the growth investor equivalent to that of the dividend option investor albeit with lesser number of units.
Last year, FA16 inserted Sec. 115BBDA under which, dividend income in excess of `10 lakh is chargeable to tax @ 10% in the case of Resident individuals, HUFs and Partnership firms. Obviously, this tax on dividend over `10 lakh is triple taxation!
Luckily, dividend from MF schemes will not be considered for this new tax on dividend income over `10 lakh. In other words, only dividend received from companies by shareholders comes under this ambit.
Very rich individuals, particularly promoters of public limited companies, collected dividends through their family trusts, thereby bypassing this dividend tax, which was applicable only to Individual and HUF assessees. Therefore, this year, the provision has been extended to all Resident assessees except domestic companies and certain funds, trusts, institutions, etc. No deduction in respect of any expenditure or allowance or set off of loss shall be allowed in computing the income by way of dividend. However, in view of the uncertain nature of receipt of dividend incomes, an assessee liable to pay advance tax may not be able to correctly determine such liability within the specified payment schedule as specified u/s 211 and may incur levy of interest on deferment of advance tax. Therefore, it is now provided that the interest u/s 234C shall not be levied subject to fulfillment of certain conditions specified therein.
Surely, we will now find proliferation of many private family trusts, each one earning less than `10 lakh by way of dividends. Once this happens, the authorities will bring in yet legislation to rope into such entities in this triple tax net
All said and done, we have a tongue-in-cheek suggestion. The companies should stop paying any dividend, irrespective of their profits and start issuing bonus shares regularly. Sale of shares, after a holding period of one year does not attract any capital gains tax.
The authors may be contacted at wonderlandconsultants@yahoo.com
