Additional tax, Dividend Distribution Tax (DDT) @ 16.995% u/s 115-O is
being charged on every domestic company distributing dividend. Finance Act 2008
has introduced w.r.e.f. 1-4-2008 sub-section (1A) to mitigate cascading effect
of DDT on dividend received by domestic company during the financial year,
subject to fulfilment of conditions as under:
- Such dividend is received from its subsidiary;
- The subsidiary has paid DDT; and
- The domestic company is not a subsidiary of any other company.
Currently DDT is mitigated only up to one level subsidiary. Clause 53 of
the Finance Bill proposes to delete third condition w.e.f. 1-7-2012. With the
deletion of third condition every domestic company (even if it is subsidiary of
any other company) can claim reduction of dividend received from its subsidiary.
This is explained in following chart:
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(Click image to see in larger size)
Proposed amendment would remove cascading effect of DDT on multiple layered companies in a group i.e. in the given example Sco2 can claim reduction on fulfilment of two prescribe conditions. Further in case there are more layers/companies between Hco & Sco2, each of such companies would be entitled of reduction of dividend distributed by its subsidiary. However it is pertinent to note that Companies Bill 2011 clause 186 restricts investments in companies only up to two layers.
Proposed amendment would remove cascading effect of DDT on multiple layered companies in a group i.e. in the given example Sco2 can claim reduction on fulfilment of two prescribe conditions. Further in case there are more layers/companies between Hco & Sco2, each of such companies would be entitled of reduction of dividend distributed by its subsidiary. However it is pertinent to note that Companies Bill 2011 clause 186 restricts investments in companies only up to two layers.
Relief is available only in respect of dividend received (not receivable)
and distributed in same financial year. Term financial year not defined in the
Act. As per S. 2(21) of the General Clauses Act, 1897 ‘financial year’ means
year commencing from 1st April.
Issue may arise in case dividend is distributed earlier and dividend from
subsidiary is received latter but within same financial year. To illustrate,
Hco distributes dividend on 30-08-12 and it received dividend from Sco on
30-09-12. Due date of payment of DDT by Hco would 14-09-12. Considering the
provisions Hco should be entitle for reduction of dividend received from Sco,
even though it has declared and paid dividend prior to receipt from its
subsidiary. In such scenario whether Hco can hold payment of DDT beyond due
date or if DDT is paid on or before due date can it claim refund of DDT? In
case DDT is not paid by Hco, whether it would be a company in default u/s 115Q
and liable for payment of interest u/s 115P? If yes, then up to which date and
on gross or net amount of dividend? These issues may be mitigated to larger
extent in case specific provisions for refund of DDT are provided u/s 237.
Further schedule DDT of ITR 6 does not have specific entry calling
details of dividend received from subsidiary. Hence it should be appropriately
modified to capture details of dividend distributed and DDT paid by the
subsidiary. In absence of this it may happen that demand for short payment of
DDT may be raised while processing of returns at CPC.
(Extracts from the article published in Income Tax Review April '12 issue)
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