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New Dividend Taxation Regime (For FY 2020-2021)

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New Dividend Taxation Regime (For FY 2020-2021)

The Finance Bill, 2020 (2020) 420 ITR 115 (st) (146) has been passed by the Parliament with around 50 plus amendments on March 23, 2020. In our earlier Blog – Important Notifications for Individuals & HUF Budget 2020 (Applicable from 1.04.2020) Dated 28th February, 2020 we briefly intimated about the proposed changes introduced in Budget 2020.

This Blog aims at understanding the Amendments related to Dividend Taxation in Detail as it stands in the Finance Act, 2020. 

1. The Finance Bill had proposed a shift in taxation of dividends – from a company-level distribution tax (DDT) to a shareholder-level tax. Due to which dividend income would attract surcharge applicable on the taxable income, which is 25 % for Rs.2-5 crore of annual taxable income and 37 % for above Rs.5 crore income. Because of this proposition the maximum effective tax rate on dividend income of non-corporate taxpayers was going to be 43% approximately (after including the maximum rate of surcharge of 37% and cess of 4% on tax amount increased by maximum surcharge).

But an amendment has been made in this providing relief to the high net-worth individuals (HNIs) with a cap on surcharge rate of 15 % on dividend income. Due to the amendment the rate of surcharge applicable to dividend income of non-corporate taxpayers (residents and non-residents) at 15% (10% if income exceeds INR 50 Lakh but not INR 1 crore & 15% if income exceeds INR 1 crore). Thus, the maximum effective tax rate will now be 36% approximately.

2. Clarity has also been provided for Dividends declared up to 31st March 2020 but distributed thereafter. To address a situation of possible double taxation in cases where dividends are declared prior to 1 April 2020 (which would be subject to DDT under the current regime), but received by the shareholder on or after 1st April 2020, the Finance Act has clarified that in cases where DDT has been paid by the company, the shareholder level exemption for dividend income will continue to apply means no taxation in the hands of shareholder.

3. After abolition of Dividend Distribution Tax with effect from 1st April 2020, dividends declared by Indian companies would be taxable in the hands of shareholders. For resident shareholders, dividends would be taxed in their hands based on tax rates they are governed with. Companies will have to deduct or withhold tax at 10 percent for dividends paid to these reside.

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/ investors will also get credit of such withholding tax against tax payable in their home country. The amendment in Finance Act, 2020 will boost the sentiment of foreign investors.

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