Author: Abhilash T G, Faculty- in- Law, Government Law College, Thrissur
A tax is a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. Many administrative divisions also impose taxes. Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent. In other words, a tax is a “pecuniary burden laid upon individuals or property owners to support the government […] a payment exacted by legislative authority ((Black’s Law Dictionary definition)).”
The primary purpose of the levy of tax is to raise funds for the public good. Which person should be taxed, what traction should be taxed etc., depend upon social, economic and administrative consideration. In short, the state requires revenue for welfare activities, and taxation is the chief source of revenue to the government. In this scenario, widening fiscal deficit is a major challenge to the revenue. One of the biggest threats to the India’s growth story was the widening fiscal deficit ((Finance Minister P Chidamparam,The New Indian Express, Business Page, Kochi Edition ,Feb 8,2013)).
The government has set a fiscal deficit target of 4.8% of the GDP for 2013-14. Direct tax includes income, corporate and wealth tax. Dividend tax is nothing but a corporate tax, where, companies declaring dividend have a duty to pay dividend tax to the Union government. Revenue from all these taxes will help the state to reduce the widening fiscal deficit. This article help us to understand the concept of what is dividend tax, meaning, nature, types, time of payment and its theoretical framework in India under the Income Tax 1961
One of the main objects of commercial enterprises is to earn profits, and the same to be distributed among shareholders by way of ‘dividend’. Dividends are payments made by a corporation to its shareholder members. In commercial usage, dividend is the share of the company profits distributed among the members ((Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 273. ISBN 0-13-063085-3)). Dividend includes any interim dividend ((Section 2(14A),Income Tax Act 1961)). Thus Income Tax Act provides an inclusive definition of dividend tax instead of a precise one. Different kinds of dividends are;
- INTERIM DIVIDEND: According to section 205(1A) ((Section 205(1A) inserted by Companies Act 2000, w.e.f. 13-12-2000))the board of directors may declare interim dividend. Interim dividends mean dividends in between two annual general meetings of a company. While perusing section2 (14A) of the Income Tax Act 1961companies declaring interim dividend are also liable to pay dividend tax.
- NORMAL DIVIDEND: Normal dividend means dividend declared at annual general meeting, such dividend is deemed to be the income of the previous year of the shareholder in which it is declared. Section 2(22) ((Income Tax Act, 1961))gives the definition of “dividend” and section 2(22) (e) deemed dividend.
- DEEMED DIVIDEND: According to section 2(22) (e) deemed dividend means any payment by way of loan or advance by a closely held company to a shareholder holding substantial interest. Thus normal dividend, interim dividend and deemed dividend are income of the assessee (shareholder), however the tax liability or tax burden to pay dividend tax in respect of dividend and interim dividend is upon the corporate entity declaring dividend.
TAX TREATMENT
In India, earlier dividends were taxed in the hands of the recipient as any other income. However since 1 June 1997, all domestic companies were liable to pay a dividend distribution tax on the profits distributed as dividends resulting in a smaller net dividend to the recipients.However, dividends from open-ended equity oriented funds distributed between 1 April 1999 to 31 March 2002 were not taxed ((Id, Section 115R)). Hence, the dividends received from domestic companies since 1 June 1997, and domestic mutual funds since 1 June 1999, were made non-taxable in the hands of the recipients to avoid double-taxation, until 31 March 2002 ((Sub-section (34) of the section 10 of the Income Tax Act in India as of 2002, added by the Finance Act 1997, modified by the Finance Act 1999 and removed by the Finance Act 2002 — The tax on dividends from companies was excluded since the tax assessment year 1 Apr 1998–31 Mar 1999, i.e. for income received since the financial year 1 Apr 1997–31 Mar 1998, however the section 115-O was introduced only with effect from 1 June 1997. Similarly for dividends from mutual funds the tax was excluded since the assessment year 2000-2001, i.e. for income received since 1 June 1999. The tax was brought back for the assessment year 2003-2004, i.e. for income received since 1 April 2002.)).
Therefore, it implies that, such dividend income is exempted from tax in the hands of shareholders in India ((Id, Section 10)), notwithstanding whether the tax is paid or not paid by the company. However deemed dividend under section 2(22)(e)from an Indian company or any dividend from a foreign company is taxable in the hands of shareholders under the head ‘income from other sources’.
NATURE OF DIVIDEND TAX
According to section 115-O(1) dividend tax is a tax on distributed profits of domestic companies. Dividend tax is a separate and additional tax in addition to normal tax payable by a company. This additional tax liability cannot be avoided even if no Income-tax is payable by a domestic company on its total income completed under the provisions of the Act.
The running rate of dividend tax is 15%. It means company is liable to pay 15% of dividend as dividend tax. Additional tax under section 115-O is not violative of the Indian Constitution. It is for the Union of India to impose income tax upon the assessee. Similarly, it has power to impose additional tax too. On a grammatical construction of this section it would appear that the tax is levied on the company and not on the shareholder.
WHEN THE ADDITIONAL TAX SHOULD BE PAID?
Dividend tax shall be paid within 14 days from the date of
(a) Declaration of dividend;
(b) Distribution of any dividend;
(c) Payment of any dividend; whichever is earliest.
LIABILITY TO PAY THE TAX
The principal officer of the domestic company and the company shall be liable to pay the dividend tax. any other person. By virtue of section 10, dividend income in respect of which tax is changed under section 115-O will be exempt in the hands of recipient.
Tax on dividend paid by a domestic company shall be taken as the final tax payment in respect of the amount declared distributed or paid as dividend. In respect of tax so paid no credit is available to the company paying tax or the recipient of the dividend or to
DIVIDEND TAX IS NOT DEDUCTIBLE
As mentioned earlier dividend tax being an additional tax in addition to normal tax payable by a company, the company or shareholders cannot claim any deduction from taxable income in respect of dividend tax levied under section 115-O. Moreover, no deduction is available from the tax on dividend under any provision.
If the company or the principal officer fails to pay the whole or any part of dividend tax within the specified time limit then it or he shall be liable to interest in addition to dividend tax at the rate of 1% per month or part thereof ((Id, Section 115P)).
In case a domestic company or principal officer of a domestic company does not pay tax on distributed profits within the specified time limit then he or it shall deemed to be an assessee in default in respect of the amount of tax payable by him or it. Consequently, all provisions regarding collection and recovery of tax contained in the Act would apply ((Id, Section 115Q)).
If any person fails to comply with the provisions of section 115-O , he shall be liable to pay as penalty a sum equal to the amount of tax which he has failed to pay. The penalty is, however, not applicable if the assesses proves that there was reasonable cause for failure ((Id, Section 271 C)).
If a person fails to pay to the credit of the Central Government the tax payable by him, as required by or under the provisions of section 115-O , he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extends to seven years and with fine . However, no person will be punishable if he proves that there was a reasonable cause for the failure or default.
CONCLUSION
Dividend declared, distributed or paid on or after June 1, 1997 but before April 1, 2002 or after March 31, 2003 is subject to dividend tax. It is a final tax payment by a domestic company in respect of the amount declared, distributed or paid as dividend. In respect of tax so paid no credit is available to the company paying tax or the recipient of dividend or to any other person. By virtue of section 10(34) dividend income (in respect of which tax is charged under section 115-O) will be exempt in the hands of recipient.