Taxation of Dividend Change in Dividend Taxation Regime Under Finance Act, 2020 May 2020

Taxation of dividend Change in dividend taxation regime under Finance Act, 2020 May 2020

With effect from 1 April 2020, the erstwhile dividend distribution tax (DDT) has been abolished and the dividend income is now taxable in the hands of shareholders.

The Finance Act, 2020 has brought about a significant The classical system of taxation of dividend in the amendment in the taxation of dividend by abolishing hands of shareholders has now been reintroduced. the imposition of DDT. Under the erstwhile DDT With effect from 1 April 2020, dividend is taxable in regime, taxes on dividend were to be paid by the the hands of shareholders and companies declaring dividend distributing company at the rate of 20.56 dividend are required to withhold taxes thereon. per cent and the dividend income was exempt from taxation in the hands of shareholders.

Snapshot of change in the dividend tax regime

Removal of Withholding cascading Deductibility Applicability tax effect of expenses requirement

• 10 per cent • Dividend received • Only interest • DDT abolished for resident by a domestic expense allowable shareholders company allowed as deduction • Dividend (reduced to 7.5 as deduction from against dividend income taxable per cent in case its gross total income subject in the hands of dividend is paid or income to cap of 20 per shareholder at credited during the cent of dividend applicable tax • Deduction allowed period from 14 May income received rates. to the extent that 2020 to 31 March by resident such dividend is 2021) shareholders. distributed by the • 20 per cent (plus domestic company surcharge and up to one month cess) or treaty rate, prior to the due whichever is lower, date of filing of in case of non- income tax return. residents, except in case of Foreign Portfolio Investors. DIVIDEND Challenges Opportunities

• Better cash flow for dividend distributing • Significant withholding tax compliance for company dividend distributing companies • Overall reduction in repatriation cost • Satisfaction of treaty entitlement conditions, of dividend payable to non-resident including tax residency, beneficial ownership shareholders and other anti-abuse provisions • Tax credit may be available in home country • Computational challenges around interplay for non-resident shareholders. of deduction under section 80M and interest allowance under section 57 • Tax return filing obligation for shareholders.

Key facets of transition to the new dividend tax regime

Non-resident shareholders • Determine eligibility under treaty based on the - Principal purpose test under multilateral following. instruments - Tax residency status - Interplay of general anti-avoidance rules - Beneficial ownership test and substance - Threshold and period of shareholding requirements • Withholding tax rate for foreign portfolio - Availability of benefit under most favoured investors. nation clause

Listed companies

• Set process for withholding tax compliance in • Manage shareholders’ expectation to limit the case of listed companies withholding tax as per treaty rates • Mapping of shareholders on record date • Changes in IT system • Develop standard formats for obtaining • Liaising with registrars/share transfer agents declaration and maintaining other documentation • Filing of Form 15CA/15CB.

Closely held promoter-driven companies

• Comparison of Limited Liability Partnership (LLP) • Trade-off between lower corporate tax vs. company structure rate and dividend taxation.

Multi-tier structures

• Evaluate timing for dividend distribution in case • Leveraging elimination of cascading effect. of multi-tier structures KPMG in India’s approach and methodology

Identification Assessment Implementation Compliance • Mapping of • Mapping the withholding • Assist in developing • Assistance in different classes tax rates applicable for standard operating compliance with of shareholders, resident and non-resident procedures laying withholding tax including shareholders down the withholding obligations, including corporates, tax process facilitating issue of • Highlighting the relevant individuals, Form 15CB, filing factors for non-resident • Assist in identifying Alternate of withholding tax shareholders to claim the documentation Investment Fund statements, issue treaty benefit requirement (AIF), Real Estate of withholding tax confirming fulfillment Investment • Advising on the certificates, etc. of all applicable Trust (REIT)/ appropriate withholding conditions • Liaising with registrar Infrastructure tax rate for non-resident and transfer agents. Investment shareholders depending • Assist in preparing Trust (INVIT) on the treaty conditions sample declarations and American and the documentation to be obtained Depository Receipt provided by shareholders from non-resident (ADR)/Global shareholders before • Advising on ring-fencing Depositary Receipt granting treaty of potential exposure on (GDR) holders benefits. account of withholding tax • Ascertaining their obligations. residency status, treaty entitlement, etc.

While the nature and areas of assistance would be customised to your specific requirements, KPMG in India’s tax service offerings include the following.

Case-specific Documentation Develop Work along Assistance Support on opinion support standard side registrars/ around 15CB advocacy operating share transfer certificates initiatives procedures agents to assess appropriate tax deduction and deposition KPMG in India contacts:

Rajeev Dimri National Head of Tax T: + 91 124 307 4077 E: [email protected]

Hitesh Gajaria Partner Tax T: + 91 22 3090 2110 E: [email protected]

Ajay Mehra Partner and Head Tax Markets and Strategy T: +91 22 3090 2701 E: [email protected]

Himanshu Parekh Partner and Head Corporate and International Tax T: +91 22 3090 2680 E: [email protected]

Sunil Badala Partner and Head Banking & Financial Services T: +91 22 3090 2100 E: [email protected]

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