Abolition of DDT was a welcome move introduced by the Finance Act 2020 which have yielded benefits to many while also creating certain interesting issues that has crept in that needs to be addressed. In this backdrop, author Kalpesh Bafna (General Manager - Finance (Direct Tax & Strategic Initiatives), Himatsingka Seide Limited) explains the fact that how DDT on one hand proved to be a boon while on the other proved disadvantageous.

The author clarified that in the absence of details of the ultimate beneficiary, the shares would be allocated to clearing members who in turn will serve the purpose of identifying the ultimate shareholders and distributing the dividend appropriately, under the new taxation system. Author elucidates the challenges that will arise in case of these clearing members who would be required to claim the refund of TDS deducted by the companies while distributing dividend on aggregate basis, thus, blocking working capital for clearing members. 

“Shift of Dividend tax along with Hassles”

The Finance Act 2020 has introduced a welcome amendment by abolishing DDT which was levied at an effective rate of 20.56% in the hands of the Indian distributing company and switching over to the classical system of taxation of dividend income in the hands of the shareholder at the applicable tax rates. Going forward, the payer domestic company would be required to withhold tax on the gross amounts of dividends at the time of payment or credit to the shareholder.

The paradox is explained by the fact that while on one hand the scrapping of the DDT is hailed as a long-awaited relief and may yield benefits to many, at the same time, with the abolition of DDT, there have also crept in many other consequential issues which need to be suitably addressed.

One of the interesting issue is with respect to listed companies identifying shareholders eligible for dividend.  The shareholder is eligible for dividend if he is a shareholder on record date. Here the fact that needs an attention is that in case buying and selling shares through stock exchange, the shares will not be allotted to shareholder on the same day, in that case the owner of shares on record will be clearing members/ brokerage firm.

Accordingly, the share purchases taken place on record date, the clearing member would become the eligible shareholder for the dividend purpose. Therefore, though the clearing member is not the ultimate beneficiary of dividend, in the absence of ultimate shareholder details, companies will distribute dividend to clearing member and they in turn will identify and distribute the dividend to ultimate shareholder. 

The challenge here is:

• the companies will deduct tax (even if the ultimate shareholder is eligible for exemption) while distributing dividend on aggregate basis and TDS certificate will be issued in the name/ PAN of clearing member. 

• Further, when clearing member pass on the dividend to ultimate shareholder they have to do further withholding tax and issue TDS certificate to shareholder?; and

• Later clearing member has to claim refund of TDS done by companies in its return of income. Here it is a working capital blockage for clearing members.

Need to wait and watch how this issue get addressed and what stand clearing members take in this regard.