The Hindu Business Line : DDT, STT: Marginal reprieve

In the last Budget before the forthcoming general elections, the Finance Minister has decided to keep corporate tax rates unchanged. Though rates of Dividend Distribution Tax (DDT) and Securities Transaction Tax (STT) also remain unchanged, the Budget proposals contain a few amendments with regard to these.

DDT

To enable domestic companies to efficiently structure their business, it is proposed to mitigate the cascading effect of DDT up to one level. For instance, when Company A, an Indian company, declares dividend of Rs 100 to its parent, Company B, it would be required to pay DDT at 16.995 per cent on Rs. 100.

When Company B subsequently declares dividend to its shareholders, say of Rs. 200, it would once again be required to pay DDT on the entire amount declared, that is, Rs. 200, which includes the Rs. 100 received from Company A. This results in DDT being levied twice on the same amount of Rs 100.

The Finance Minsiter has sought to reduce the burden of double DDT on the Rs. 100 that suffers DDT twice by proposing that the parent company, Company B in our case, should be entitled to claim a credit for the DDT paid by its subsidiary, that is, Company A.

Therefore, in the above illustration, Company B would be required to pay DDT only on the additional Rs 100 declared.

However, this benefit would be available only in a case where the parent company is the ultimate parent, and not a subsidiary of another company. It follows therefore, that in case of a multi-layered holding structure, DDT suffered at lower levels of the ladder, except for at the level immediately below the ultimate holding company, would not be available as a credit to the ultimate parent.

STT

STT paid by a taxpayer in respect of taxable securities transactions entered into in the course of business would now be allowed as a deduction from business income of the assessee. STT is currently allowed as a rebate against income-tax payable on income in respect of taxable securities transactions. The proposed amendment should increase the tax payable, albeit marginally, for a taxpayer paying tax at the full rate.

However, where the taxpayer has a business loss, he can now claim STT paid as a deduction and carry the same forward as a part of his business loss, to be set off at a future date. Future tax savings would be marginally higher under the proposed scenario as against the current one.

(The author is Head-Tax, KPMG.)

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