Nov. 13, 2009 (The Hindu Business Line) --

S. Murlidharan

The first major change proposed, perhaps involuntarily, by the Direct Taxes Code Bill, 2009 is that even the loans and advances given by closely-held companies hitherto taxed as dividend in the hands of the recipients if they happened to be substantial shareholders thereof would now be taxed in the hands of the company by way of Dividend Distribution Tax (DDT).
Conscious decision?

One does not know whether there is a conscious policy decision taken in this regard underpinning this change. For all one knows, this could well be an omission or a slip because Section 56(2) does contemplate taxing dividend in the hands of the recipient if DDT thereon is not payable by the company.

But Section 99 containing the DDT regime has (perhaps) been remiss in leaving out loans and advances by closely-held companies from its clutches so much so that the obvious bottom line is that DDT now will be payable even on loans and advances extended by closely-held companies to their dominant shareholders.

If this is an omission, one hopes it would be made good. But if it is a conscious decision, then there could be a debate on the wisdom of it. DDT after all is a concessional tax, although it constitutes a double taxation of the same income in the hands of the company because dividend after all is paid out of tax-paid income, as it were.

The moralists could argue that those who camouflage their dividend as loan should not receive any indulgence from the law even on the extenuating circumstance of doing away with double taxation.
Pass-thru entities

Secondly, on dividend paid to pass-thru entities, there is no DDT as per the DTC. One of the eligible pass-thru entities is mutual funds. To wit, if a company has got mutual fund investments in its shares aggregating to 25 per cent of its share capital, only 75 per cent of the dividend paid by it would be exigible to DDT.

Hitherto, DDT has all along been paid on the entire dividend declared irrespective of who received it.

Be that as it may, the issue is income received from mutual funds is exempt from tax vide entry 20 of the Sixth Schedule and the income of a mutual fund is exempt from tax vide entry 15 of the Seventh Schedule. A pass-thru exemption is on only when the ultimate beneficiary pays tax on the specified income.

In this case, the mutual fund will be receiving dividend paying no tax on it and would in turn declare dividend out of it to the unit-holders who too are exempt from tax. In the event, to the extent of dividend declared by a company to the mutual fund industry there would be a loss of revenue to the exchequer.

Section 99(6) of DTC reads as thus: “The dividend distribution tax charged under the foregoing provisions shall be collected after allowing credit for pre-paid taxes, if any, in accordance with the provisions of this Code.”
Advance DDT

The DTC can confound even a profound and keen reader of a law who examines it with a fine-tooth comb to establish connectivity with provisions strewn across it. But it does appear that there is no requirement under the DTC to pay advance DDT. Indeed, right from 1997, that is, from the inception of DDT in India, there was never a need for paying advance DDT.

DDT is payable within a fortnight of declaration or payment of dividend, whichever is earlier. In the event, Section 99(6) sticks out as odd. Can it be interpreted to mean that corporate tax and DDT or fungible?

This is not the case under the extant norms even though in the UK, DDT has been treated as one form of advance corporate tax.
(The author is a Delhi-based chartered accountant.)