The Direct Taxes Code (DTC) is, by now, a well-known concept to India Inc and the tax professional fraternity as it has been a matter of discussion and debate for almost six years now. The finance ministry released the revised draft—the Direct Taxes Code, 2013—for public discussion and comments in the first week of this month. DTC 2013, set to replace the half-a-century-old Income-Tax Act, has been in the news since 2009; but the latest draft came weeks before the ongoing general election, raising the prospect of the document being junked when a new finance minister takes charge next month.
In the revised draft, focus is on raising more revenue from high-net-worth residents, while leaving the slab rates unchanged for others. DTC 2013 proposes an additional levy of 10% tax on the recipient of dividend if the dividend income exceeds R1 crore. Such dividend would fall under the income category of ‘special source’ and no deduction of expenditure would be allowed to be set-off against such income. This means, while non-residents are proposed to be kept out of this net so as not to further dampen the FDI environment, residents are covered.
At present, any domestic company after paying 30% corporate tax on its business profits is required to pay 15% dividend distribution tax (DDT) if it wants to distribute dividends to its shareholders. Further, once DDT is paid by the domestic company, such dividend remains tax exempt in the hands of the shareholders. However, the proposed additional tax will be paid by the resident shareholders and will be over and above the 15% paid by the distributing company. Here, if the recipient of such dividend is a company, then whether 10% rate would apply or would it be subject to MAT at the rate of 20% is also not clarified in DTC 2013.
At present, the credit of DDT is not available to the shareholder except in a case wherein the company receiving dividend from its subsidiary (in which it holds more than 50% equity shares) declares dividend to its ultimate shareholders. Here, it is to be kept in mind that DDT was introduced as a measure for easier collection of tax. So, it is clear that DDT at the rate of 15% is nothing but the taxes paid by the company for its shareholders. Thus, rather than over-taxing a select set of investors with such additional tax and discouraging them from