More tax on the rich earning dividend exceeding ₹10 lakh

There have been some major changes in India’s dividend taxing regime in the Budget. Until now, the burden of paying tax on dividend was borne by the companies paying dividends through the Dividend Distribution Tax (DDT).

Up to March 31, 2015, companies paid DDT at the rate of 15 per cent of the net dividend payable to shareholders. Though the rate of DDT remained unchanged in the subsequent year, the computation mechanism changed and increased the effective rate of dividend to 20.36 per cent (including surcharge and cess). Although Budget 2016 has kept the dividend tax burden on companies declaring dividends unchanged, it has increased the overall dividend tax by laying an additional burden of paying tax at the rate of 10 per cent on certain shareholders receiving dividend income exceeding ₹10 lakh. This means, any individual, HUF or firm, which receives dividend of ₹10 lakh or more, is liable to pay additional tax.

For instance, where an individual, A, has earned a total dividend income of ₹11 lakh from the period April 1, 2016, to March 31, 2017, A will be liable to pay 10 per cent tax on the entire amount of ₹11 lakh. This move comes as a result of the government’s action to levy higher taxes on persons earning relatively higher incomes.

This will also adversely impact Limited Liability Partnerships which are commonly seen as holding shares in group companies since an LLP is included within the definition of a firm. It must be noted that this additional tax is not applicable on dividends received from mutual funds. Also, corporate shareholders as well as non-resident recipients are not liable to this tax. Unfortunately, no marginal relief has been allowed to taxpayers receiving dividend marginally higher than ₹10 lakh. For instance, where the taxpayer earns dividend of ₹9.99 lakh, the additional tax will not be levied.

However, where the taxpayer earns ₹10.01 lakh of dividend, a tax of ₹1.001 lakh would have to be paid resulting in lower net income. Hence, it is recommended that the tax should apply only on dividends in excess of ₹10 lakh.

In an attempt to stimulate more investments in the Real Estate Investment Trusts (REITs), it has been proposed that dividend distribution by Special Purpose Vehicles to REITs and InvITs having specified shareholding in the SPVs will not be subject to DDT.

The writer is Partner, Deloitte Haskins & Sells LLP