The benefit would also not be fully available in a three-layered group structure.
Much has been written about the Budget proposals relating to DDT (dividend distribution tax), more specifically, about the set-off of the tax paid by subsidiary on dividends declared to its parent. Is it really a relief? wonder Ms Saloni Singhal and Ms Vandana Ahuja, tax professionals with KPMG.
As you may be aware, a domestic company, in addition to the income-tax payable on its taxable profits, also pays DDT on dividends declared, distributed or paid to its shareholders.
The corporate sector for long has been agitating against this issue, stating that the share of profit received by a shareholder is practically taxed twice: first, in the hands of the company when the profits are earned, as corporate income-tax; and second, when the said profits are distributed, as DDT, argue the two.
This issue is more severely faced by business houses that have multi-layered group structures, they add, in the course of a recent e-mail exchange with Business Line.
For example, company A has a subsidiary company B, which in turn has a subsidiary company C. All the companies would suffer DDT levy on declaration of dividends. Thus, the profits of company C reach the ultimate parent company A after two levies of DDT.
Now, what has the Finance Minister announced in his Budget Speech? He has proposed to allow a set-off, in the hands of the holding company, of the dividends that are received from its subsidiary.
This relief, however, comes with a few riders. One, the dividends are received from the subsidiary; two, the subsidiary has paid DDT thereon; and three, the company claiming the set off is not a subsidiary of any other company.
Clearly, the benefit of this set off is restricted only to a domestic company as a foreign company is not liable to levy of DDT, reason Ms Singhal and Ms Ahuja . Also, the benefit would also not be fully available in a three-layered group structure.
In our above example, company B would not be able to avail itself of the said benefit as it is a subsidiary of company A and one of the conditions for this set off would not be fulfilled. Only company A would be able to claim set off in respect of dividend received from company B (assuming company A is directly held by the promoters).
Earlier, the Income-Tax Act had a similar provision (Section 80M), wherein a deduction was allowed to a domestic company for the dividends received from another domestic company, against the amount of dividend distributed by the first mentioned company, recount the professionals. The said provision was relevant when the dividend income was taxable in the hands of the shareholders.
The proposed amendment may seem to be a modified version of the discontinued Section 80M, but it is not as wide in scope as Section 80M that exempted every layer of dividend declared, rues the duo.
Though the Finance Minister intended to remove the cascading effect of DDT, the proposed amendment is not meeting its true intent, as it would benefit a two-layered domestic company structure only.
Something to cheer
Overall, however, the amendment is a welcome move and would be much appreciated by Indian companies, opine Mr Rohan Solapurkar and Mr G.V. Krishna Kumar of the PricewaterhouseCoopers tax team.
As a result of this amendment one could see an increase in the value of holding companies and consequently one could witness a larger number of holding companies being listed on the stock exchanges in India, they anticipate.
Though no major changes were expected in the Budget this year, there was an expectation from a certain portion of the industry that DDT would be deleted, recount Mr Solapurkar and Mr Krishna Kumar. This did not happen, yet the amendment to the provisions of DDT definitely did bring about some cheer.
The Finance Minister introduced an amendment to Section 115O of the Income Tax Act, 1961 which addresses the issue of double taxation of dividends in the hands of a domestic holding company.
As per the provisions of Section 115O of the Act, any domestic company which declared or distributed or paid any amount as dividend (including interim dividends) whether out of current or accumulated profits was liable to a DDT of 16.995 per cent (including surcharge and education cess).
This implied that if a subsidiary company declared dividends to its parent holding company, there was a double layer of taxation. Once when the subsidiary company declared dividends, it was liable to pay dividends. Again, the parent company, which recorded the dividends received by it as income was liable to pay DDT when it declared dividends.
Mr Solapurkar and Mr Krishna Kumar concede that the question as to why the beneficial amendment about DDT should have been restricted only to single-tier holding companies still goes unanswered.
It would only have been fair to introduce the benefit of this section to multiple layer holding company structures as well. Such a benefit was available to Indian companies via 80M of the Income Tax Act prior to its deletion by the Finance Act 2003.