All You Need To Know About Dividend Distribution Tax

The budget 2019 presented by Finance Minister Niramala Sitharaman had many hits and misses. But the introduction of tax on buyback of shares at 20% for many listed companies has been a topic of discussion since the past few days. The companies resort to buyback shares in order to avoid Dividend Distribution Tax. Let’s familiarise with the concept first.

What is a Dividend

Dividend is the company’s profit paid to the investors. There are multiple companies that are listed on stock market and share their profit with their investors. The companies pay a very small component of their profit to the shareholders that are called as dividends.

What is a Dividend Distribution Tax

The provision of Dividend Distribution Tax (DDT) was introduced in by the finance bill 1997. Only the domestic companies are liable to pay this tax. The provisions relating to DDT are governed by Section 115O of Income tax laws in India. The listed companies have to pay the tax of 15%. However, after adding all the surcharges and all the cesses the effective tax rate of DDT is 20%.

When should it be paid

A company is supposed to pay the tax on the distributed profits to the government within 14 days of declaration, distribution or payment of any dividend, whichever is earliest. If a company is unable to pay within that stipulated period of time, then an interest worth 1% will start accumulating per month.

The DDT is levied on the company, along with additional dividend tax levied on the shareholder who receives over Rs 10 lakh as dividend. 

Special features

There are multiple special provisions in regards to the DDT. Firstly, the DDT is payable separately, over and above the income tax liability of a Company. The company need not to pay DDT, if dividend is paid to any person for or on behalf of the New Pension System Trust. Section 115BBD provides for concessional rate of tax of 15% on dividend received by an Indian Company from its foreign subsidiary.