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Tax in a Different Form: Surcharge & DDT

Author: AN Shanbhag Sandeep Shanbhag/Wednesday, June 6, 2018/Categories: Tax, Expert View

Tax in a Different Form: Surcharge & DDT

The government collects additional tax (over and above the basic income tax) by giving it different nomenclature such as surcharge, DDT, STT, CTT, STCG, LTCG, stamp duty, customs, MAT, AMT, GST. Of these DDT (dividend distribution tax) and surcharge as of primary importance for us.

Surcharge on Rich and Super-rich

Where the total income of every individual, HUF, AOP, BOI, whether incorporated or not, or every artificial juridical person exceeds Rs 1 crore, a surcharge is slapped @15% on the tax payable with a marginal relief ensuring that the total income over the threshold of Rs 1 crore will not exceed the tax payable.

For clarity, take taxable amount of a non-senior individual having income of Rs 1 crore 3 lakh. The income tax thereon, without surcharge is Rs 29,02,500. Surcharge thereon @15% works out at Rs 4,35,375. Consequently, the surcharge payable on the extra of Rs 3,00,000 happens to be Rs 4,35,375. This is injustice. Therefore, the revenue concedes a marginal relief and the extra tax payable is Rs 3 lakh only. The break-even point where the excess income equals the extra liability works out at Rs 4,41,754.

FA17 has roped in such assessees having income exceeding Rs 50 lakh but not exceeding Rs 1 crore, by levying on them a surcharge @10% with associated marginal relief. The break-even for such persons works out at Rs 1,35,310.

This surcharge is @12% in the case of co-operative societies, firms, local authorities and those persons who are subjected to AMT if their income exceeds Rs 1 crore. For domestic companies, it is 7% for income between Rs 1 crore and Rs 10 crore and 12% if it exceeds Rs 10 crore.

It is claimed that this extra tax is applicable only on rich and superrich. This is strictly not true. Unfortunately, this surcharge of 12% along with the cess of 4% is also applicable to DDT and taxable capital gains. Surcharge is applicable even to the following types of income earned even by those under Rs 2.5 lakh.

Sec.

Description

Basic Rate-%

Total Rate-%

115O

Dividend Distribution Tax - Equities

15

17.4720

111A

STCG on Equity & Equity-based MFs

15

17.4720

112

Taxable LT Gains

20

23.2960

115R

Dividend of Debt-based MF Schemes

25

29.1200

115QA

Buy Back of Shares by Domestic Companies

20

23.2960

115TD

Defaulting Trust Registered u/s 12AA

30

34.9940

115TA                               

Securitisation Trusts — for Individuals

25

29.1200

 

                                   — for Others

30

34.9940

 

Consequently, the exchequer is slated to get more revenue from the poor you and me on surcharge applicable on income under the above-mentioned sections rather than the super rich.

Sec. 115BBDA: Dividend over Rs 10 lakh

Even if normally, the dividends paid by domestic companies are tax-free in the hands of the recipient, FA16 introduced this section to impose an additional tax @10% on dividends received in excess of Rs 10 lakh during the FY by a resident individual, HUF or a firm.

Neither any deduction in respect of any expenditure or allowance or set-off of loss nor the advantage of any gap between the normal income and the tax threshold shall be allowed in computing the income by way of dividend.

For instance, if the dividend income of a very senior citizen is Rs 12 lakh and his normal income after the permissible deductions and exemptions is Rs 4 lakh, his tax liability will be Rs 20,000 (=10% of (12-10) lakh).

FA17 has extended this provision to all assessees except domestic companies and charitable trusts.

Prior to FY 03-04, any dividend received by the companies was taxed in the hands of the companies and subsequently dividend paid by these companies or MFs was also taxed in the hands of the investors. This was obviously a case of double taxation. There was a hue and cry against this from the media. To stem these protests, the government played a clever ploy. It made the dividend tax-free in the hands of the shareholders. To recoup the loss it introduced DDT at source; again a case of double taxation but surreptitious in nature, invisible to the shareholders. This DDT is in addition to the normal income tax payable by them.

This resulted in the authorities collecting much more tax on dividends, since now even those who are under the minimum tax threshold are charged this DDT. The double taxation continues to prevail. Obviously, this tax on dividend over lakh is triple taxation!

DDT, by itself, has risen to quite a high level of 17.4720% on equities and 29.1200% for debt-based MF schemes and Securitisation Trusts.

This can be termed as tax terrorism.

Very rich individuals, particularly promoters of public limited companies, collected dividends through their family trusts, thereby bypassing this DDT. Now this loophole is plugged.

We have a tongue-in-cheek suggestion. Corporates should stop paying any dividend, irrespective of their profits and start issuing bonus shares regularly. Sale of shares, after a holding period of one year did not attract any capital gains tax. Now, the FA18 has plugged even this loophole by levying 10% tax on LTCG.

FA17 has doled a small mercy. In view of the uncertain nature of receipt of dividend incomes, it is provided that the interest u/s 234C shall not be levied subject to fulfilment of certain specified conditions.

For diverting funds from expenditure on consumer goods into productive investments, to check inflationary pressures, enlarge opportunities for the people and in the long run to reduce inequalities the government has offered selective tax concessions. We shall have a look at some of these concessions next time.

The authors, A.N. and Sandeep Shanbhag, are leading financial advisors. Write to them at wonderlandconsultants@yahoo.com

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