Double taxation of dividends has been a topic of debate in as much as the ``amount in question'' was suffering tax in hands of the companies in the first instance. When parts of such profits were distributed to the shareholder as dividends, they were again subject to taxation in the hands of the shareholders. Keeping in view the above and in order to encourage investment in the shares of domestic companies and to boost the capital market, the Finance Act 1997 has exempted dividends received from the domestic companies on or after June 1, 1997. The exemption will help the long-term investors who have seen the dividend on their investment rising every year but were forced to pay part of it towards taxes. The newly inserted section 10(33) exempts ``any income by way of dividends referred to in Section 115-O''. Under the existing system of tax on dividends, every company at the time of paying dividends to its shareholder in excess of Rs 2,500 was required to deduct tax at the specified rate. The process of deduction and deposit of tax and issue of TDS certificate was quite long and cumbersome and involved a lot of time.

At times, the certificate does not reach the shareholder due to postal delays, causing complexities while filing the income-tax return.

The new act has changed all this and now onwards dividend from a domestic company will be exempt from tax, subject to certain conditions.

* The dividend should be an amount declared distributed or paid by such company by way of dividend (whether interim or otherwise) on or after the first day of June 1997.

* The company is required to pay an additional tax at the rate of 10 per cent on such distributed profits.

* Even in cases where no income-tax is payable by a domestic company on its total income, the tax on distributed profits U/S 115-O is payable by the company.

* The tax levied and paid as above shall be treated as the final payment of tax and no further credit shall be claimed by the company or any other person in respect of the amount of tax so paid.

* The principal officer of the company and the company shall be liable to pay income-tax to the credit of the central government within 14 days from the declaration of dividends.

* If the principal officer and the company fail to pay the income-tax to the credit of the central government, he or it shall be liable to pay simple interest at the rate of 2 per cent for every month or part thereof on the amount of tax payable.

* On failure to pay the tax, severe penalties and even prosecution have been recommended.

* The deduction under section 80 L and 80 M in respect of corporate dividend have been discontinued.

* The dividend from such trust such as the Unit Trust of India (UTI), which were given special status as company with their income distribution termed as dividend, have been kept out of this provisio. The assessee will have to pay regular tax on the income from units and he is eligible to claim deduction under section 80 L (allowed up to Rs 15,000).

* Dividend shall have the same meaning as defined in clause (22) of section 2 of the Income-Tax except sub clause (e) of 2(22) of the Income Tax Act - loan or advance to a shareholder.

The new provision, in effect, foists an additional liability on the company and may in the long run result in lower payouts by way of dividend to the shareholders.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.