Domestic firms get DDT reprieve, conditions apply

TNN / Mar 3, 2008, 00:00 IST

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The Finance Bill 2008 proposes to provide some relief to the domestic companies from the levy of DDT, under section 115-0, by mitigating the cascading effect of dividend distribution tax up to one level.

Domestic firms get DDT reprieve, conditions apply

NEW DELHI: India Inc has always been up in arms, ever since they had to bear the dividend distribution tax. To add insult to injury, the rate was hiked last year to an effective tax rate of 16.995%.
Now, for some tax nitty-gritty, DDT is considered a below-line item and no deduction is available in computing company's taxable profits.
Further, tax laws did not provide for any mechanism to claim a credit for the DDT paid by the companies which was a double whammy to those domestic companies having a mutli-layered business structure.
The Finance Bill 2008 proposes to provide some relief to the domestic companies from the levy of DDT, under section 115-0 by mitigating the cascading effect of dividend distribution tax up to one level. It has been proposed that with effect from April 1, 2008, the amount of dividend to be paid by a domestic holding company will be reduced by the amount of dividend received by the domestic company from its subsidiary during the same financial year.

But there are conditions attached. This deduction cannot be claimed by a domestic company which is a subsidiary of any other company. Further, the same amount of dividend shall not be taken into account for reduction more than once. Prior to 2004, when dividends were taxable (there was no DDT), relief for cascading effect of tax on dividends was available to domestic companies under section 80M.
As per the provisions of section 80M, where income of a company included dividend income from another domestic company, deduction was allowed in respect of such dividend received from another domestic company to the extent not exceeding dividend distributed on or before due date.

Let us examine the current proposal with the help of an illustration. An Indian Company A has a wholly-owned subsidiary B which in turn has another wholly-owned subsidiary C. Now the dividend distributed by C is Rs 100.
As can be observed, the provisions of the proposed section 115-0 result in savings, but only at the ultimate parent company level, as the ultimate holding company can set off the dividend received from its subsidiary company to the extent of dividend paid by it.
Further, with removal of such cascading effect, one could explore public listing of holding company as well. However, one cannot overlook the flip side of this section! Benefit of this provision can only be claimed by the ultimate parent company.
Thus, intermediary holding company (in our illustration B Ltd) will continue to bear the burden of DDT without any relief. Also, this benefit is available only in respect of dividends received and declared in the same financial year.
Separately, multinational companies which have a presence in India in the form of subsidiaries will be unable to claim the benefit since the ultimate parent will be located in overseas jurisdictions.
(Ernst & Young)

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