Budget 2018 impact - Deemed dividends to now attract dividend distribution tax
Published: Feb 17, 2018
THE last full-fledged Budget of the Narendra Modi-led National Democratic Alliance (NDA) was presented in the Lok Sabha on February 1. One of the proposals made in the Finance Bill, 2018 relates to the manner in which "deemed dividends" are to be taxed. The memorandum to the Finance Bill states that taxing deemed dividends in the hands of the shareholders made tax collection a challenge. These provisions seek to bring deemed dividends on par with regular dividends.
Deemed dividend is a loan given or advance made by a company to its shareholders who hold more than 10% of voting power or to a concern where shareholders enjoy more than 20% beneficial interest. Currently, if deemed dividend provisions are triggered, shareholders are taxed under the head "Income from other sources" at normal rates applicable to the shareholder. The company giving the loan or providing advance is required to withhold applicable taxes on such deemed dividends.
The Budget proposes that the company giving the loan or providing advance would now be required to pay Dividend Distribution Tax (DDT) on such loans or advances at 30% (plus applicable surcharge and cess).A tax exemption has been proposed in the hands of the shareholders.
Exempting deemed dividends in the hands of shareholders is a welcome step as it does not attract any additional tax liability on them. It is interesting to note that the withholding obligations cast on the company have still been retained without any amendments.It may have to be seen whether the tax withholding provisions are required since under the new provisions the company would be required to pay DDT on deemed dividends.
[DV Manohar is a Partner and Chethan Bhat is a Manger with Deloitte Haskins and Sells LLP. The views expressd are strictly personal.]
