By Sanjeev H. Narsinghani
(B. Com, A. C. A.)

As per the Finance Bill 2003 the finance minister has once again proposed to make dividend’s received from domestic companies tax free with the introduction of Sec 10(34) thus all dividends received by a person after 01/04/2003 will be considered tax free. However, as per the amendment to Section 115-O the company distributing dividend’s after 01/04/2003 will be liable to a payment of Dividend Distribution tax (DDT) at the rate of 12.50%.

This proposed change in the provisions of the Income Tax Act 1961 seems to have been brought in with a view to give the financial markets a boost since now the investor will be happy to receive income which is free of tax and though the company distributing the dividend will be paying a DDT of 12.50% it is still beneficial to any tax paying assessee who has a taxable income over Rs. 60,000/- since he is, as it is, liable to pay a tax at the rate of 20% - 30% on the income receivable by him.

It may also be noted that in case of individuals & H.U.F.s, a substantial part of whose income comprises of dividends may get additional benefit to the extent that if their gross total income (GTI) excluding dividend income is now below Rs. 1,50,000/- they will be entitled to a rebate U/s. 88 at the rate of 20% instead of 15% they would be entitled to if the dividend income was taxable and their GTI was above Rs. 1,50,000/-. Thus they would now be required to invest a lesser amount into investments entitled to Rebate U/s. 88 of the I. T. Act, 1961.

Eg : In case of an individual having a net business income of 1,20,000/- and income from other sources of Rs. 75,000/- which includes Rs. 50,000/- dividend income and Rs. 15,000/- interest from bank & Rs. 10,000/- as other income the following is the comparative position of his taxes.

Thus the assessee makes a net saving, in tax, of Rs. 7,650/- (Rs. 13,900 - Rs. 6250 DDT) and also has an additional liquidity of Rs. 22,000/- since he has now invested Rs. 78,000/- instead of the Rs. 1,00,000/- he was required to invest for A. Y. 2002-03.

Another important impact of the Amendments proposed by the Finance Bill 2003 will be on the companies whose income includes dividends received from other domestic companies and who intend declaring a dividend out of the incomes earned in the financial year 2002-03. In case of these companies, if an interim divided is distributed by them, to the extent of dividends received by them from other domestic companies, before 31/3/2003 they will not be required to pay any DDT and the dividend declared will be taxable in the hand’s of the share holders. In case of such companies the portion of their dividend income they have distributed, as interim dividend, will be deductible from their gross total income under Sec. 80M (reintroduced by Finance Act 2002).

Thus if an interim dividend is declared to the extent of dividend income earned by them the total tax on this interim dividend will be paid by the shareholder which can be a maximum of 31.50 % in case of Individual/H.U.F. shareholders and 36.75% in the case of Firm’s & corporate assessees. As against this, if the dividend is declared by them after 01/04/2003 though the dividend declared will be tax free in the hands of the shareholders the company will now pay income tax @ 36.75% for A. Y. 2003-04 since the dividend has not been declared and will also pay DDT @ 12.50% on distribution made by it after 01/04/2003 Thus the total taxes paid out of the dividend income of the company available for distribution would be 49.25% (IT 36.75% + DDT 12.50%) . However in case of companies listed on the various stock exchanges, a minimum notice period has to be given prior to the meeting for the declaration of dividend and though the stock exchanges have the power to waive this minimum notice period, it is very unlikely that they will do so in this particular instance. Thus those companies which are not listed with any stock exchange and have dividend income from other companies which they propose to distribute to their shareholders as dividends could now declare interim dividend and save on the total tax paid on the amount so distributed.

The Finance Bill 2003 proposes to alter Section 115R of the I. T. Act 1961 making income distributed by the Mutual funds tax free in the hands of the investors whereas a DDT of 12.50% will be payable by the Mutual Fund. However in case of Income distributed by mutual funds to the unit holders of their Open Ended Equity Oriented Schemes no DDT will be payable by the mutual fund for the income distributed by it for a period of one year commencing from the first day of April 2003.

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