FM brings dividend income of trust holders under tax ambit

There is a rude tax shock for promoters and employees of companies who own stake in their respective companies through trusts, which have been receiving substantial dividends.

There are many companies where employees and promoters own shares through trust. Among them include Cadila Healthcare, Eicher Motors, Tech Mahindra, M&M, Marico, Glenmark Pharmaceuticals, Piramal Enterprises and Wipro.

The Finance Minister has proposed to tax all individual and entities receiving dividend income of more than ₹10 lakh, except for domestic companies and certain funds, charitable trusts and institutions.

In order to rationalise the tax treatment of dividend income, a new Section 115BBDA was inserted in the IT Act. Accordingly, a resident individual/Hindu undivided family (HUF)/ firm with gross dividend income in excess of ₹10 lakh was made liable to pay tax 11.85 per cent. (Tax rate 10 per cent, surcharge 15 per cent, education cess 3 per cent) on dividend in excess of ₹10 lakh.

The Finance Bill now proposes to expand the scope of Section 115BBDA of the IT Act to cover all resident taxpayers other than (i) a domestic company; and (ii) certain specified institutions, funds, trusts, etc, set up for charitable/ religious/ educational/ medical purposes.

That means, the proposed amendment will extend to dividends earned by trusts/ association of persons (AOPs) other than those specifically exempted.

“Since a number of family offices are organised as trusts, the proposed amendment would have far reaching implications for such structures,” said an accounting and tax expert firm BDO India.

“There is likely to be a huge outcry on the profits being taxed at three stages before the same could be enjoyed. Cumulatively, these taxes shave off about 53 per cent of profits before it reaches the shareholder,” it added.

The above amendment is proposed to be made effective from April 1.

However, there is a marginal relief for tax payers receiving dividends.

As taxpayers receiving dividends referred to in Section 115BBDA of IT Act may not be able to correctly determine such dividend income due to the uncertainties involved in its declaration and receipt, they are compelled to defer paying the advance tax till the time such dividends are actually received by them and thus suffer interest under Section 234C of the IT Act.

“With a view to address this concern, the Finance Bill proposes that no interest under Section 234C of the IT Act shall be levied in case shortfall in payment of advance tax is on account of under-estimation or failure in estimation of such dividend income by the taxpayer,” said the Budget.