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Individual:- For individual shareholder the dividend shall be taxable as per the applicable slab rates. Towards this, a TDS will be deducted at 10% on dividends received above INR 5,000.

Moreover, the government abolished additional tax of 10% on dividend income in excess of Rs. 10 lakh per year for Resident non-corporate taxpayer.

Companies:-For corporate shareholder the dividend shall be taxable as per the effective tax rates, which would range from 25.17% to 34.94%.

The Act has not made any corresponding amendments to Section 115BBD of the Act which imposes a 15% tax on inbound dividends received by an Indian company from “specified foreign subsidiary companies” Such dividends continue to remain taxable at 15% in the hands of the Indian company.

However, the Companies would be able to reduce the tax on dividend to the extent the Company distributes dividend to its shareholders provided that such dividend is distributed one month before the due date of filing of the Return of Income. This is brought about by inserting section 80M.

Section 80M provides that where the gross total income of a domestic company in any previous year includes any income by way of dividends from any other domestic company or a foreign company or a business trust, there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of such domestic company, a deduction of an amount equal to so much of the amount of income by way of dividends received from such other domestic company or foreign company or business trust as does not exceed the amount of dividend distributed by it on or before the due date.

Mutual Funds:- The budget has proposed to insert Section 194K under which Mutual Funds, on payment of dividend to residents, will be required to deduct TDS at the rate of 10%.

For non-resident shareholder
Indian companies shall be liable to withhold taxes at 20% on payment of dividend to a non-resident shareholder. This rate could be lower if the benefit under the tax treaty is available to such shareholders. Tax treaties with Singapore, Mauritius, Netherlands, Australia, United Kingdom and USA provide for a lower withholding tax rate of 5% to 15%. Hence, non-resident shareholders can claim benefit of lower tax rates under respective treaties. Now, the foreign shareholders will also get credit of such withholding tax against tax payable in their home country. This amendment will boost the sentiment of foreign investors. This amendment is a positive move for foreign investors who did not receive the benefit of DDT tax credit in their home jurisdictions. Such foreign investors will now be able to avail credit of such taxes withheld, subject to the availability of benefit under tax treaty.

Deduction of Expenditure
Under the earlier provisions since the dividend income was tax exempt the expenditure incurred (directly or indirectly) was disallowed under section 14A. Now, since the dividend income is taxable there would be no disallowance ofthe expenditure under section 14A.

It may be noted that in case of exempt income like dividend exists a provision for disallowance of related expenses under section 14A of the Income Tax Act read with rule 8D of Income Tax Rules and the assessing officers used to make disallowance of full amount of interest as well as expenditure directly relating to income which does not form part of total income and an amount of one percent of annual average of the monthly averages of the opening and closing balances of the value of investment in shares. Sometime these disallowances were many times more than the amount of dividend actually received by the taxpayers and the Courts struck down or substantially reduced the unreasonable disallowance .

However the Act has introduced a new proviso whereby the deduction would be available under section 57 in respect of interest expenditure incurred. However such deduction would be restricted to 20% of the dividend income earned. It may be noted that in case of dividend income no deduction will be allowed except limited deduction of 20 per cent of dividend for interest paid on amount borrowed and invested in shares or units of mutual fund. Here is a big catch. Suppose you have purchased a share of face value of Rs.10 at Rs.500 per share and you get a dividend of 100 per cent (of face value of share) that is Rs.10 per share. Suppose the person has taken loan at interest rate of 10 per cent then he has to pay interest of Rs.50 in respect of cost of each shareper year. In such a case the deduction of only Rs.2 for interest, being 20 per cent of dividend amount, will be allowed under section 57. The balance interest of Rs.48 will be artificially disallowed. This restriction is against the basic canons of taxation of net income, and is totally unjustified and improper. The interest on such borrowed money will be restricted irrespective of the fact whether the investor has obtained loan from a Bank or from a private party. This will increase the effective rate of tax on dividend.

Whether interest deduction would be available only in respect of borrowings from which dividend is received or would be available at flat 20% of the dividend earned could be another point of dispute. Further, whether deduction would be on net dividend or gross dividend in case there the Company has availed deduction under section 80M could be another point of dispute. Since section 57 precedes section 80M there is a strong case to contend that 20% cap shall apply on gross dividend.

Again the Assessee could argue that the dividend income is taxable under income from other sources because of specific provision and if the company is engaged in the business of trading in shares then entire expenditure would be available as deduction under section 36(1)(iii) or section 37 of the Act.

Efforts to cap the deduction under section 57 will give rise to litigation – which we have witnessed under section 14A.

About the Author: Mr. Dhrunal Bhatt is a Chartered Accountant having experience of over 25 years in corporate tax. The views expressed by the author are expressly his personal. Neither the author nor the organisation is liable in any way, to the reader who acts on the basis of this article.