Concessional Rate of DDT received by Indian Company from Specified Foreign Companies

As per existing tax provisions, income from dividends is tax free in the hands of the investor. Further the dividends from domestic companies are tax-exempt, dividend from foreign companies are taxable in hands of investor. However, this is not to say that there is no tax levied at all.

On the contrary, there is a levy of 15% of the dividend declared as distribution tax. This tax is paid out of the profits/reserves of the company declaring the dividend. Additional surcharge of 5% on DDT and education cess of 3% is levied.

Concessional rate of tax on dividends received by Indian Companies from Specified Foreign Companies

     i.            Dividend received by an Indian Companies from specified foreign companies to be subject to a 15% as against the existing rate of 30%.

   ii.            This rate of 15% would be applied on gross dividend, in the sense that no expenditure would be allowable in respect of such dividend.

 iii.            However, this concessional rate would be applicable in respect in respect of dividend received from a foreign company in which the holding of the Indian Companies less than 26% of the nominal value of the equity share capital.

 iv.             Therefore, if the total amount of the Indian Companies, includes income by way of dividend declared, distributed or paid by a Specified Foreign Company, the income tax payable would be aggregate of –

a)      Income – tax @ 15% on gross dividend from such specified foreign company; and

b)      Income – tax with which the assessee would have been chargeable had its total income been reduced by such dividend.

   v.            Specified Foreign Company means a foreign company in which the Indian Company holds 26% or more in nominal value of the equity share capital of the company.

Example:  A Ltd., an Indian Company, receives the following dividend income during the P.Y. 2011-12 –

1. a.      From shares held in XYX Inc. a foreign company, in which it holds 25% of nominal value of equity share capital – Rs. 80,000.
2. b.      From shares held in PQR Inc., a foreign company in which it holds 30% of nominal value of equity share capital – Rs. 1, 85,000.
3. c.       From shares held in Indian Companies – Rs. 90,000.

A ltd, has paid remuneration of Rs. 18,000 for realizing dividend, the breakup of which is as follows –

Rs. 4,000 (XYZ Inc.)

Rs. 9,000 (PQR Inc.)

Rs. 5,000 (Indian Company)

The business income of A ltd. Computed under the provisions of the Act is Rs. 40 lacs. Compute the total income and tax liability of A ltd. Ignoring MAT.

Solution:

Computation of Total Income of A Ltd.

Particulars	Amount (Rs.)
Profits or Gains of Business or Professions	40,00,000
Income from other sources ( See note below)	2,61,000
Total Income	42,61,000

 

Note: Dividend income taxable under “Income from Other Sources”.

Particulars	Amount (Rs.)
From XYZ Inc. – net dividend (i.e., Rs. 80,000 – 4000) is taxable at normal rates	76,000 Â
From PQR Inc. – gross dividend is taxable @ 15% u/s b115BBD [no deduction is allowable in respect of any expenditure as per section 115BBD(2)]	1,85,000
From shares in Indian Companies Rs. 90,000 – exempt under section 10(34) since dividend distribution tax would have been paid under section 115-O [As per section 14A, no deduction is allowable in respect of expenditure income to earn exempt income]	Nil
Total Amount	2,61,000

 

Now, the Computation of Tax Liability of A Ltd.

Particulars	Amount (Rs.)
Tax @ 15% under section 115BBD on Rs. 1, 85,000 (Gross Dividend)	27750
Tax @ 30% on balance income of Rs. 40,76,000	12,22,800
Â	12,50,550
Add: Education Cess @ 2% & SHEC @ 1%	37,517
Tax Liability	12,88,067