As per the Section 115BBDA, income by way of dividend in excess of Rs 10 lakh is chargeable at the rate of 10% for individuals, Hindu Undivided Family (HUF) or partnership firms, promoters holding shares through private trusts will have to pay 10% tax on dividend income for more than Rs 10 lakh and form here on this rule will also apply for private trusts. This will have an impact on succession planning of promoters, because many own their company shares via family trusts.
According to a report in Economic Times, “The proposed amendment to tax dividend income in excess of Rs 10 lakh will have an adverse impact on family trusts, “ said Pranay Bhatia, partner direct tax, BDO India. “After last year’s budget, many large investors had set up family trusts to reduce their tax outgo. “
According to the same report, Gautam Mehra, partner-tax leader, PwC India, said, “The proposal to cover the levy of additional tax on dividends to persons other than individuals and HUFs would mean that trusts, other than those specifically exempted, would have to pay this tax as well. It is to be seen if any exemption is provided to regulated trusts such as Alternate Investment Funds.“ Charitable trusts are exempted from this provision.
“With a view to ensure horizontal equity among all categories of tax payers deriving income from dividend, it is proposed to amend section 115BBDA so as to provide that the provisions of said section shall be applicable to all resident assesses except domestic company and certain funds, trusts, institutions, etc,“ the Budget proposal said.
“This tax policy is to bring horizontal equity. Certain people who were reducing their tax liability by receiving dividend through a trust structure instead of receiving it as individuals will now be caught in the tax net, “said Prashant Khatore, tax partner at global consultancy EY.
Promoters and employees of companies such as Eicher Motors, Tech Mahindra, M&M, Marico and Glenmark Pharmaceuticals own stake in their respective companies through trusts, which have been receiving substantial dividends.
