Budget 2014 has carried out a major amendment in Dividend Distribution Tax (DDT) applicable to the dividends (whether interim or otherwise) declared, distributed or paid by a domestic company, (public or private limited, listed or otherwise) to its shareholders or by a non-equity oriented mutual fund to its unit holders.
Currently, in both the cases, such dividend or income suffers additional tax – at 15% (16.995% with surcharge at 10% and cess at 3%) on dividends distributed to its shareholders by a company u/s 115(O) and at 25% (28.325% with surcharge and cess) on income distributed by MFs to its unit holders ((Individuals and HUF) u/s 115(R).
The entry of DDT in tax legislation has an interesting history. Prior to the introduction of DDT in FY 03-04, dividend received by companies was taxed in the hands of those companies and subsequently dividend paid by these companies to their shareholders was also taxed in the hands of the shareholders. 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; again a case of double taxation but surreptitious in nature.
It is always advantageous to the revenue to tax a small amount from all, even those who are not in the normal tax net than to collect a large, but reasonable amount, from the few who are actually liable to pay. We personally feel that this was and continues to be a fraud on investors.
Incidentally, having met with unprecedented success with DDT the authorities adopted a similar ploy with Security Transaction Tax (STT) and subsequently Commodity Transaction Tax (CTT).
DDT = TDS
This DDT is in fact TDS. If not, the tax authorities want it to be converted as such after suddenly discovering that there was some difference between the intention of the legislation and actual practice. Normally, the TDS is applied on the entire income earmarked to be paid and not the income actually received by the assessee. The case of DDT was different. The tax was applied on the income actually received. After the Budget, this situation will change and DDT will virtually become TDS. For clarity, let us take some cold numbers (excuse the odd, not rounded numbers) to understand this complex claim.