Finance Act, 2020 has amended the provisions of section 194 of the Income Tax Act, 1961 (“Act”) to provide for TDS on Dividend income declared, distributed and paid by a domestic company which was earlier exempt from income tax under section 10(34) subsequent to the abolishment of DDT (dividend distribution tax) on the dividend amount declared by a domestic company. Finance Act 2020 has also withdrawn the exemption from dividend income from the financial year 2020-21.
Introduction
After the amendment, dividends paid or distributed by Indian Companies on or after April 1, 2020 would be taxable in the hands of shareholders. As per the new provisions, an Indian company is required to deduct the applicable tax at source under Sections 194 & 195 of the Act in case of residents & non-residents shareholders respectively.
Finance Act, 2020 has amended section 194 to include dividend for tax deduction. At the same time, the rate of TDS u/s 194 of 10 per cent is prescribed. The threshold limit is increased from Rs 2,500/- to Rs 5,000/- for the dividend paid other than cash only for a Resident Individual. Further, the earlier mode of payment of “an account payee cheque or warrant” is changed to ‘any mode’.
Dividend income from shares was earlier exempt till FY 2019-20 since domestic companies were required to pay DDT on the dividend declared and thus the same was made exempt from tax in the hands of shareholders u/s 10(34).
Finance Act 2020 has withdrawn the exemption from dividend income declared by a domestic company and thus dividend income is taxable in the hands of the receipt shareholders.
It should be remembered that unless an income is chargeable to tax, there cannot be any TDS. Therefore, the dividend income must constitute income in the hands of the shareholders on and from 01.04.2020 in order to attract the provisions of section 194. If the dividend does not constitute income in the hands of the shareholders in FY 2020-21, there cannot be any TDS u/s 194.
This is possible only when the company has paid DDT on the dividend income since DDT was applicable on the dividend declared till 31.03.2020. Under the circumstances, if a company has declared Interim Dividend for FY 2019-20 on 20-03-2020 and the dividend amount of Rs 1,00,000/- was paid to the shareholder account on 22-04-2020, then the company is liable to pay DDT on the dividend income and the receipt of the dividend income shall remain exempt from tax in the hands of the shareholder even though the dividend income is received in FY 2020-21. Hence, the company is not required to deduct income tax on the dividend paid to the shareholder on 22-04-2020 under section 194 since the dividend already suffered DDT and the exemption will continue even in FY 2020-21 for such dividend.
Legal provisions for TDS on Dividend
Section 194 reads as follows-
Dividends.
194. The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall, before making any payment by any mode in respect of any dividend or before making any distribution or payment to a shareholder, who is resident in India, of any dividend within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2, deduct from the amount of such dividend, income-tax at the rate of ten per cent :
Provided that no such deduction shall be made in the case of a shareholder, being an individual, if—
(a) the dividend is paid by the company by any mode other than cash; and
(b) the amount of such dividend or, as the case may be, the aggregate of the amounts of such dividend distributed or paid or likely to be distributed or paid during the financial year by the company to the shareholder, does not exceed five thousand rupees:
Provided further that the provisions of this section shall not apply to such income credited or paid to—
(a) the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), in respect of any shares owned by it or in which it has full beneficial interest;
(b) the General Insurance Corporation of India (hereafter in this proviso referred to as the Corporation) or to any of the four companies (hereafter in this proviso referred to as such company), formed by virtue of the schemes framed under sub-section (1) of section 16 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972), in respect of any shares owned by the Corporation or such company or in which the Corporation or such company has full beneficial interest;
(c) any other insurer in respect of any shares owned by it or in which it has full beneficial interest.
Prior to the amendment, there was a third proviso to section 194 which restricted a company from deduction of tax from the dividend income which suffered DDT u/s 115-O. This proviso is omitted from section 194 w.e.f 01.04.2020.
The following important points are noteworthy for TDS on dividend u/s 194-
1. Who shall deduct tax on dividend income: Tax shall be deducted by an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India (e.g. Indian subsidiary of a foreign company) shall be required to deduct TDS on the dividend income. The Indian company may be a listed company or an unlisted company. Even tax is required to be deducted by an unlisted company which pays dividend to its shareholders.
2. When tax shall be deducted on dividend income: Tax shall be deducted on dividend income before making the payment of dividend to the resident shareholders by any mode including cash. In case the recipient shareholder is a non-resident shareholder then tax shall be deducted under section 195.
Thus, the tax shall be deducted at the time of making payment of dividend to the shareholders and not when the dividend is declared.
3. Rate of TDS: The rate of TDS on dividend income u/s 194 is 10%. Prior to the amendment by the Finance Act, 2020, the rate of TDS was specified in the Finance Act itself. However, the rate of TDS on dividend is now included in the Income Tax Act itself in section 194.
The government has announced a relief due to outbreak of COVID-19 pandemic and effective from 14.05.2020 the rate of TDS on dividend u/s 194 is reduced to 7.5% instead of 10%. The reduced rate of TDS on Dividend u/s 194 shall be applicable uotp 31.03.2021.
The Central Board of Direct Taxes issued a Press Release dated May 13, 2020 stating that TDS rates on the amount paid or credited to non-salaried resident persons during the period from May 14, 2020 to March 31, 2021 has been reduced by 25%. Thus, in case of resident Shareholders, the rate of tax deduction on dividend income shall be @ 7.5% instead of the prescribed 10% under Section 194 of the Income Tax Act, 1961. It is also clarified that there shall be no reduction in rates of TDS, where the tax is required to be deducted at higher rate due to non furnishing of PAN. However, legislative amendments in this regard are yet to be made.
However, if the shareholder does not provide PAN or Aadhaar Number to the company or provides invalid PAN or Aadhaar Number then the rate of TDs shall be increased to 20% as per section 206AA. In this case, the relief shall not be applicable.
No surcharge or education cess shall apply to the prescribed rate of TDS where tax is withheld from payment of dividend to a resident shareholder.
Rate of TDS on Dividend under section 194 for resident
If the shares are held in Demat form, the PAN needs to be updated with the Depository. If the shares are held in physical form, the PAN needs to be updated with the Company’s Registrar and Transfer Agents,if any or with the Company itself.
4. Equity, as well as Preference shares dividend, are covered: Section 194 explicitly covers dividend paid to preference shareholders besides, dividend on equity shares.
5. Threshold limit: The threshold limit provided for non-deduction of tax (TDS) on dividend income is Rs. 5,000. However, it should be noted that the exemption from the tax deduction is given only for shareholders who are resident Individuals.
The threshold limit does not apply in case the shareholder is a HUF, firms, company, trusts, etc. In other words, tax is required to be deducted on the entire dividend amount in case of non-individual shareholders even if the dividend paid is Re. 1.
The threshold limit also does not apply to non-resident individuals.
Threshold limit for a resident non-individual shareholder (Resident Company/ Firm/ HUF/ AOP/ Trust / Local Authority /Artificial Juridical Person, etc): The entire amount of dividend will be subject to TDS under section 194 for non-individual resident shareholders without any threshold limit. The tax deduction rate will be 7.5% for the FY 2020-21 (in place of regular 10% rate) provided the shareholder has furnished his valid PAN to the company, otherwise the TDS rate will be 20%.
A further condition is added whereby to avail the threshold limit of Rs. 5,000, the dividend must be paid to the resident individual shareholder in any mode other than cash. If the dividend is paid in cash, then the threshold limit of Rs. 5,000 shall not apply even if the shareholder is a resident individual and tax is required to be deducted from the entire amount of dividend paid.
Note: Normally, in the income tax, individuals and HUFs are treated at par in all respects. However, in this case, this trend has been deviated. The threshold limit of Rs. 5,000 from TDS on dividend u/s 194 is given to an individual (resident) but the same is not extended to a HUF.
6. Exempt Shareholders: No tax is required to be deducted where the shareholder is the following insurance companies-
a) Life Insurance Corporation of India
b) General Insurance Corporation of India
c) any other insurer
in respect of any shares owned by it or in which it has full beneficial interest.
However, note that no such exemption is provided for shareholders who are banks or financial institutions.
7. Dividends covered: Section 194 covers the following types of dividends paid by an Indian Company-
(a) Dividend covered u/s 2(22)(a)
(b) Dividend covered u/s 2(22)(b)
(c) Dividend covered u/s 2(22)(c)
(d) Dividend covered u/s 2(22)(d)
(e) Dividend covered u/s 2(22)(e)
Meaning of Dividend under Income Tax Act
In general, the term ‘Dividend’ refers to the distribution of profits by a company to its shareholders in proportion to his shareholding. The portion of profits which a shareholder receives by virtue of his shareholding in a company is termed as ‘dividend’.
However, the term ‘dividend’ is defined in the Income Tax Act in an inclusive manner. Thus the definition of ‘dividend’ under the Act is not exhaustive. It includes certain components in the definition of ‘dividend’ which are traditionally not understood as dividend, more particularly sub-clause (e) of section 2(22) which deems loan under specified circumstances as ‘dividend’.
For the sake of brevity, the definition of dividend is not repeated here, however, the sub-clauses of the definition are discussed in brief.
When no TDs on Dividend income is not applicable u/s 194
1. No TDS on dividend on filing of Form 15G/Form 15H: According to section 197A read with Rule 29C, if a resident individual shareholder furnishes a declaration in Form 15G or Form 15H to the company paying the dividend, then no TDS shall be made from the payment of dividend to such resident individual shareholder.
The provisions related to furnishing of Form 15G is contained in the sub-section (1) of section 197A. As per this sub-section, only a resident Individual can furnish Form 15G for non-deduction of tax on dividend income.
Read more on Form 15G/Form 15H: Form 15G and Form 15H in Income Tax
Hence, any person other than an Individual viz., HUF, company, firm, LLP, Trust, AOP/BoI, etc. cannot furnish Form 15G for non-deduction of tax on dividend income.
Further, Form 15G can be filed by an individual when the total income does not exceed the basic exemption limit of Rs. 2,50,000/- including the dividend income for the financial year in which dividend income is distributed/paid.
Form 15H is applicable only for a resident Individual who is a senior citizen or a very senior citizen. Further, Form 15H can be furnished when the tax on total income for the financial year including the dividend income is nil.
Can HUF shareholder submit Form 15G/Form 15H for non-deduction of TDS on dividend
As stated above, as per section 197A(1), for the purpose of TDS on dividend under section 194, only an individual can submit Form 15G to the dedcutor . Hence, a HUF cannot submit Form 15G for non-deduction of tax on dividend income u/s 194. Further, Form 15H is applicable only for a resdient senior citizen individual. Hence, question of submitting Form 15H by a HUF does not arise.
Note: A non-resident Individual cannot furnish Form 15G or Form 15H
2. No TDS on dividend on furnishing a lower/Nil TDS certificate u/s 197: Section 197 of the Income Tax Act, 1961 provides for the facility of NIL deduction of tax at source or at a deduction at a lower rate of tax. To avail of this benefit the assessee whose TDS is likely to be deducted on dividend income should make an application before the TDS Assessing Officer who has a jurisdiction over his case. For this purpose, the recipient of dividend income has to apply for a certificate for Nil or lower deduction of TDS on their receipts in Form No 13.
Any person can furnish a lower or Nil TDS certificate to the company making the payment or distribution of dividend issued by the income tax department. Once a certificate issued u/s 197, the company making the payment of dividend shall deduct TDS at Nil rate or the lower rate rate as the case may be as authorised to do so as per the certificate.
It should be noted that there is no bar on the type of persons that can apply for the certificate u/s 197. It covers any person including a non-resident payee/deductee. Thus where dividend is subject to TDS u/s 195, the recipient or the shareholder may approach his AO for a nil or lower TDS certificate u/s 197. The only limitation is that for dividend income, the application for nil or lower TDS certificate can be filed only for TDS on dividend income u/s 194 or u/s 195 but is not applicable for TDS on dividend income u/s 196C and u/s 196D.
3. In case of threshold limit applies: If the dividend to a resident individual shareholder does not exceed Rs 5,000 in a financial year, no TDS on dividend u/s 194 is applicable.
Note: To file an application in Form No. 13 for a certificate u/s 197, the applicant must have the TAN of the deductor/the company paying the dividend income. Further, the applicant must have a valid PAN.
4. No TDS on dividend paid to Insurance Companies: TDS is not applicable on the dividend paid to the insurance companies as per exclusion provided in section 194. In this case, the insurance company has to provide a self-declaration that the shares are owned by it and it has full beneficial interest along with a self-attested PAN to the company.
5. No TDS on dividend paid to Mutual Funds: TDS is not applicable on the dividend paid to a Mutual Fund specified under clause (23D) of section 10 of Income Tax Act, 1961. Such Mutual Funds should provide a self-declaration that they are specified in Section 10 (23D) of the Income Tax Act, 1961, self-attested copy of PAN card and registration certificate.
6. TDS applicable to Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs): Tax shall be deducted at source @ 20% (plus applicable surcharge and cess) on dividend paid to Foreign Institutional Investors (“FIIs”) and Foreign Portfolio Investors (“FPIs”) in view of the specific provision under section 196C/196D of the Income-tax Act 1961.
Please note that there is no threshold provided for which no tax will be withheld. Entire dividend is subject to withholding of tax.
7. No TDS on dividend paid to Alternative Investment Funds: Alternative Investment Fund (AIF) established or incorporated in India having an income that is exempt under section 10(23FBA) and is governed by SEBI Regulations as Category-I or Category-II after submission of necessary documentary evidence to that effect.
8. No TDS on payment of dividend to certain shareholders covered by section 196: Section 196 provides for non-deduction of tax from the payment of dividend to the following shareholders-
(i) the Government, or
(ii) the Reserve Bank of India, or
(iii) a corporation established by or under a Central Act which is, under any law for the time being in force, exempt from income-tax on its income, or
(iv) a Mutual Fund specified under clause (23D) of section 10.
These shareholders must have full beneficial interest of the shares owned by it.
9. No TDS from payment of dividend to exempt entities: As per CBDT Circular No. 18/2017 dated 29.05.2017, no TDS is required to be made from the payment of any income including dividend to the following entities-
(i) “local authority”, as referred to in the Explanation to clause (20);
(ii) Regimental Fund or Non-public Fund established by the armed forces of the Union referred to in clause (23AA);
(iii) Fund. by whatever name called, set up by the Life Insurance Corporation of India on or after 1st August, 1996, or by any other insurer referred to in clause (23AAB);
(iv) Authority (whether known as the Khadi and Village Industries Board or by any other name) referred to in clause (23BB);
(v) Body or authority referred to in clause (23BBA);
(vi) SAARC Fund for Regional Projects set up by Colombo Declaration referred to in clause (23BBC);
(vii) Insurance Regulatory and Development Authority referred to in clause (23BBE):
(viii) Central Electricity Regulatory Commission referred to in clause (23BBG);
(ix) Prasar Rharati referred to in clause (23BBH);
(x) Prime Minister’s National Relief Fund referred to in sub-clause (i), Prime Minister’s Fund (Promotion of Folk Art) referred to in sub-clause (it), Prime Minister’s Aid to Students Fund referred to in sub-clause (iii), National Foundation for Communal Harmony referred to in sub-clause (ilia), Swachh Bharat Kosh referred to in sub-clause (iiiaa), Clean Ganga Fund referred to in sub-clause (iiiaaa) of clause (23C);
(xi) Provident fund to which the Provident Funds Act, 1925 (19 of 1925) referred to in sub-clause (i), recognized provident fund referred to in sub-clause (ii), approved superannuation funds referred to in sub-clause (iii), approved gratuity fund referred to in sub-clause (iv) and funds referred to in sub-clause (v) of clause (25);
(xii) Employees’ State Insurance Fund referred to in clause (25A);
(xiii) Agricultural Produce Marketing Committee referred to in clause (26AAB);
(xiv) Corporation. body, institution or association established for promoting interests of members of Scheduled Castes or Scheduled Tribes or backward classes referred to in clause (26B);
(xv) Corporation established for promoting interests of members of a minority community referred to in clause (26BB);
(xvi) Corporation established for welfare and economic upliftment of ex-servicemen referred to in clause (26BBB);
(xvii) New Pension System Trust referred to in clause (44).
TDS on Dividend paid to a Non-Resident shareholder by a domestic company (listed or unlisted companies)
Section 194 covers TDS on dividend paid to a resident person. In case of a non-resident, the deduction of tax on dividend is covered by section 195 of the Income Tax Act. Surcharge and Health & Education cess does not apply to the prescribed rate of TDS in case of resident payees whereas the same applies in case of non-resident payees.
Dividend payment to non-resident shareholders is subject to deduction withholding tax at the rate of 20% which shall be increased by applicable surcharge and health & education cess of 4%. A lower rate for withholding may apply if the benefit of the tax treaty/DTAA is available to the shareholders. Where the tax is withheld as per the DTAA, then the surcharge and cess shall not apply.
The provisions related to withholding of tax on dividend distribution to non-resident Indians are the same as applicable to any non-resident individual.
For the purpose of withholding of tax from dividend payments, non-residents are of the following categories-
a) Foreign Shareholders (includes non-resident individuals, foreign companies, etc.)
b) Foreign Institutional Investors (“FIIs”) and Foreign Portfolio Investors (“FPIs”)
According to section 195, TDS on dividend paid to non-resident shareholders shall be required to be deducted as per the “Rates in Force” which as per section 2(37A) means :
“(i) …..
(ii) …..
(iii) for the purposes of deduction of tax under section 194LBA or section 194LBB or section 194LBC or section 195, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year or the rate or rates of income-tax specified in an agreement entered into by the Central Government under section 90, or an agreement notified by the Central Government under section 90A, whichever is applicable by virtue of the provisions of section 90, or section 90A, as the case may be.”
Where the dividend is distributed to a non-resident shareholder, the tax shall be required to be withheld under section 195. However, where the dividend is distributed or paid in respect of GDRs of an Indian Company or Public Sector Company (PSU) purchased in foreign currency or to Foreign Portfolio Investors (FPIs), the tax shall be required to be deducted as per section 196C and section 196D, respectively.
As per section 195, the withholding tax rate on dividend shall be as specified in the Finance Act of the relevant year or under DTAA, whichever is applicable in case of an assessee. Whereas, the withholding tax rate under section 196C and 196D is 10% and 20%, respectively. The rate of TDS for the purpose of section 195 in respect of dividend income is prescribed in the Finance Act, 2020 is 20%.
Thus comprehensive list for rate of TDS for non-residents is given below-
Rate of surcharge in case of non-resident individuals/HUF/ AOP/BOI/AJP: If the amount of dividend payment in a financial year does not exceed Rs. 50 Lakh, then the question of surcharge does not arise. However, the rate of surcharge shall not exceed 15% except for the TDS on payment of dividend for FII/FPI as given below-
Rates of surcharge for non-resident companies: In case of foreign companies or non-resident companies, there is no surcharge if the amount of dividend paid to the non-resident shareholder does not exceed Rs. 1.0 crore. The rate of surcharge for different level of income or dividend payment to a foreign company is given below-
Note: Health and Education Cess @ 4% shall be applicable on rates of tax and surcharge as listed above, in all the cases. However, no surcharge and cess shall apply if the tax rate is applied as per DTAA.
Rate of TDS on Dividend for non-residents
In respect of non-resident Shareholders (including foreign companies), the TDS rates mentioned above will be further subject to any benefits available under the Double Taxation Avoidance Agreement (DTAA) read with Multilateral Instrument (MLI) provisions, if any, between India and the country in which the non-resident is considered resident in terms of such DTAA read with MLI.
Benefits of the lower rate of TDS on Dividend under DTAA
Dividend income is generally chargeable to tax in the source country as well as the country of residence of the assessee and, consequently, country of residence provides a credit of taxes paid by the assessee in the source country. Thus, the dividend income shall be taxable in India as per provisions of the Act or as per relevant DTAA, whichever is more beneficial. According to the provisions of section 90, where the non-resident shareholder is a resident of any other country with which the Indian government has entered for the Double Tax Avoidance Agreement (DTAA) and if the rate of tax on the dividend income is more beneficial to the non-resident compared to the rate of TDS specified in the Finance Act, 2020 then such non-resident may claim the benefit of lower tax under the DTAA.
As per most of the DTAAs India has entered into with foreign countries, the dividend is taxable in India in the hands of the non-resident beneficial owner of shares at the rate ranging from 5% to 15% of the gross amount of the dividends. Hence, non-resident shareholders can claim the benefit of lower tax rates under respective tax treaties.
In DTAA with countries like Canada, Denmark, Singapore, the dividend tax rate is further reduced where the dividend is payable to a company which holds a specific percentage (generally 25%) of shares of the company paying the dividend.
India is a signatory to the Multilateral Convention (MLI) which shall implement the measures recommended by the OECD to prevent Base Erosion and Profit Shifting. MLI is a binding international legal instrument which is envisaged with a view to swiftly implement the measures recommended by OECD to prevent Base Erosion and Profit Shifting in existing bilateral tax treaties in force. With respect to dividend income, Article 8 (Dividend Transfer Transactions) of MLI provides for a minimum period of 365 days for which a shareholder, receiving dividend income, has to maintain its shareholding in the company paying the dividend to get the benefit of the reduced tax rate on the dividend.
Further, the foreign shareholders will get credit for such withholding tax against tax payable in their home country.
Where a non-resident shareholder is entitled to claim the tax treaty benefit under the DTAA, and the tax rate provided in the respective tax treaty is beneficial to the shareholder, then the rate of tax as per the tax treaty may be applied. However, in cases where tax is required to be deducted as per section 196C or section 196D, the benefits of DTAA shall not be applicable.
In order to avail tax treaty benefits, non-resident shareholders would be required to submit the below documents:
(i) Tax Residency Certificate (TRC) for the financial year 2020-21, the year in which the dividend is received by the non-resident shareholder. Such TRC shall be required to be obtained from the tax authorities of the country of which the shareholder is a resident.
(ii) Self declaration in Form No. 10F as per Rule 21AB. In case the TRC contains all the requisite information as specified in Form No. 10F then this Form is not required. In case, TRC contains some part of the information as required in Form 10F then information for such parts in the Form may be ignored.
(iii) Copy of self attested Indian PAN Card if allotted
(iv) Self-declaration that the non-resident shareholder receiving the dividend income is the beneficial owner of such income
(v) Self declaration that Dividend income is not attributable or effectively connected to any Permanent Establishment (PE) or Fixed Base in India.
A non-resident wishing to claim concessional rate benefit under the tax treaty is required to submit the aforesaid documents before the record date of declaring dividend with the company or within such time limit as may be specified by the company.
What if the DTAA rate is not applied
In case of listed companies where there are a large number of non-resident shareholders it will be an uphill task to check and verify all the details and documents of each and every non-resident shareholder. Further, if the documents submitted are not found to be satisfactory, the company may deny the benefit of DTAA. Under the circumstances, the Indian company may deduct tax on dividend payment @ 20% plus applicable surcharge and cess.
If the company withhold the tax @ 20% as prescribed under the Finance Act then the non-resident shareholder may not be able to claim the full credit of the tax so withheld in India since their home country will allow credit of tax only to the extent of the tax rate prescribed in the relevant DTAA. For example, if the DTAA provides for withholding of tax @ 15% but the tax is actually withheld @ 20%, the non-resident shareholder may not be able to claim the excess tax withheld in India. Hence, the only option left for the non-resident is to file a return in India and claim the excess deduction of tax as refund after applying the rate of tax as per DTAA.
Return filing in India not required for non-resident having only dividend income
As per section 115A(5), a non-resident is not required to file a return of income in India if:
i) his or its total income consists of only of dividend or interest income, or royalty or FTS income; and
ii) tax has been withheld on such income at the rates which is prescribed under section 115A of the Act.
Thus, non-residents earning only dividend income from India would not be required to file their income tax returns in India provided tax has been withheld at a rate not lower than the rate prescribed under section 115A which is at 20% (plus applicable surcharge and health and education cess).
It should be noted that this relief from non-filing of income tax return in India is available only if tax is withheld at the rates prescribed under section 115A of the Act i.e. 20 percent plus applicable surcharge and education cess in case of dividend income. Therefore, if the tax is withheld as per the lower rate of tax as per DTAA with their home country then this relief shall not be available to the non-resident and such non-resident shareholder will be required to file Income tax return in India. This is perhaps done to check their eligibility of claiming the benefits of DTAA by scrutinizing their returns in India.
Requirement to furnish Form 15CA and Form 15CB
As per section 195(6) read with Rule 37BB, any payment made by a resident person to a non-resident requires furnishing a self-declaration in Form 15CA and also required to furnish a certificate in Form 15CB certified by a Chartered Accountant. The Form 15CB is not required in cases where the payments to non-residents is less than Rs. 5 lakh during a financial year.
Read more on Form 15CA/Form 15CB: A Guide to Form 15CA and Form 15CB for foreign remittances including for NRIs
Thus a company paying dividend to non-resident shareholders is required to furnish Form 15CA and a certificate of a Chartered Accountant in Form 15CB with the income tax department. This is irrespective of the fact whether tax is withheld as per Income Tax Act or DTAA.
Further, this Form 15CA and Form 15CB is required to be furnished for each non-resident shareholder.
Information on tax deducted to the shareholder
Shareholders can check Form 26AS from their e-filing accounts at https://incometaxindiaefiling.gov.in or www.tdscpc.gov.in
Shareholders can also use the “View Your Tax Credit” facility available at www.incometaxindia.gov.in. Please note, the credit in Form 26AS would be reflected after the TDS Return is filed on a quarterly basis by the Company, and the same is processed by the Income-tax department.
How to claim the credit of TDS if the shares are held in Brokers Pool Account under Margin
This happens mostly in case of listed shares. As we know, a shareholder is entitled to receive the dividend which he beneficially owns who held the shares in dematerialized form with a broker. Against these holdings, many brokers allow pledge of these shares as margin for executing trades. These shares are then transferred to the Brokers pool account. When the shares are held as margin in the brokers pool account, still the individual shareholder is the beneficial owner of these shares and is entitled to receive the dividend. The dividend income from those shares are taxable in the hands of the shareholder and not the income of the broker. However, since in the members register the broker is recorded as the shareholder, the dividend on these shares are paid to the company who in turns credit the same to the ledger of the shareholder.
Normally, shares once taken into the broker's pool account are not transferred back to the shareholders' account to save the charges payable to National Securities Depository Ltd (NSDL) or Central Depository Services (India) Ltd (CDSL). However, if the margin is cleared, the shareholder may request to take back the shares in his demat account. In this process, if the shares are held in the pool account on the record date, the pool account gets credited with the dividend amount.
Till the preceding year, there was no problem since the dividend income was exempt in the hands of the shareholder. Now from 01-04-2020, the dividend is taxable in the hands of the shareholder and is also subject to TDS u/s 194.
If the shares have not been transferred to the demat account of the shareholder, he is not treated as a shareholder of the company. The dividend gets credited in the broker’s pool account from where the same is credited to the shareholder’s account. However, since the broker is not the beneficial owner of these shares, he cannot be taxed on the dividend income from these shares. If the tax is deducted in the name/PAN of the broker, then the shareholder won’t get the credit of TDS and the dividend income will be taxed wrongly in the hands of the broker.
Though the broker can transfer the receipt of dividend amount from the pool account to the account of the shareholder but he cannot transfer the TDS which will appear in his Form 26AS.
In order to mitigate the hardships, the legislature has amended the provisions of Rule 37BA of the Income Tax Rules, 1962 w.e.f. 01.04.2009.
Rule 37BA(2) provides as follows-
(2) (i) Where under any provisions of the Act, the whole or any part of the income on which tax has been deducted at source is assessable in the hands of a person other than the deductee, credit for the whole or any part of the tax deducted at source, as the case may be, shall be given to the other person and not to the deductee :
Provided that the deductee files a declaration with the deductor and the deductor reports the tax deduction in the name of the other person in the information relating to deduction of tax referred to in sub-rule (1).]
(ii) The declaration filed by the deductee under clause (i) shall contain the name, address, permanent account number of the person to whom credit is to be given, payment or credit in relation to which credit is to be given and reasons for giving credit to such person.
(iii) The deductor shall issue the certificate for deduction of tax at source in the name of the person in whose name credit is shown in the information relating to deduction of tax referred to in sub-rule (1) and shall keep the declaration in his safe custody.
In the above provisions of Rule 37BA, it has clearly been mentioned that credit for tax deducted at source and paid to the Central Government shall be given to the person provided that the deductee files a declaration with the deductor and the deductor reports the tax deduction in the name of other person in the information relating to deduction of tax referred to in sub-rule (1) of Rule 37BA of the Rules.
In view of the above provision of Rule 37BA and the provisions of section 199(1) of the Act, the credit for tax deduction should be given to the person from whose income tax has been deducted. The Rule as amended by the Amendment Rules, 2009 w.e.f. 01.04.2009 makes it abundantly clear that the credit will be given based on the information by the deductor. The proviso to sub-rule (2) of Rule 37BA of the Rules mitigates the hardship faced by the assessee for claiming credit of TDS whereby deductee files a declaration with the deductor and the deductor reports the tax deduction in the name of other person in the information relating to deduction of tax as referred to in sub-rule (1) of Rule 37BA of the Rules.
CBDT vide Press Note dated July 10, 2012 clarified that in case the income on which tax has been deducted at source is assessable in the hands of a person other than the deductee, the deductee must file a declaration with the deductor that credit for the TDS shall be given to the other person and not to the deductee. The declaration filed by the deductee must contain the name, address, Permanent Account Number of the person to whom credit is to be given and reasons for giving credit to such person. The deductor must, in the TDS statement, report the tax deduction in the name of such other person and also issue the TDS certificate in the name of the person in whose name credit is shown in the TDS statement.
No form for filing declaration u/r 37BA(2) has been prescribed: It should be noted that so far any form has not been prescribed for furnishing the said declaration by the deductee to the deductor. However, the Rule and the press note both say about the mandatory contents of such declaration. The declaration shall be given in plain paper or the letter-head of the declarant. Further, the deductor is not required to furnish the declaration to the income tax authority and shall be kept by the deductor in his records.
Hence, in case of pool account shares, the broker shall submit a declaration under Rule 37BA(2) to the company or the Registrar and shall state the fact that since the demat account holder is the beneficial owner of the shares and the same is held in broker’s pool account, therefore, the credit of tax shall be given to the beneficial shareholder and not to the broker.
In this manner, the dividend will be assessed in the hands of the shareholder and will enable the shareholder to claim the credit of TDS on dividend by the company while filing his return of income.
Other TDS provisions for TDS on dividend u/s 194
Furnishing TDS statements
According to section 200(3), every deductor is required to furnish a statement of tax deduction and deposit of TDS in the prescribed form and within the prescribed time limit after paying the tax deducted to the credit of the Central Government within the prescribed time as detailed above.
Therefore every person deducting tax under section 194C, is required to furnish a TDS statement under section 200(3).
As per Rule 31A of Income Tax Rules, 1962, the TDS statement is required to be filed electronically with the Income Tax department.
Rule 31A(1)(b)(ii) and 31A(2) prescribes filing of quarterly TDS statements u/s 200(3) in Form No. 26Q for residents and Form No. 27Q for non-residents within the following time limits-
Manners of filing TDS statements
As per Rule 31A(3), the TDS statements may be furnished in any of the following manners, namely:—
(a) furnishing the statement in paper form;
(b) furnishing the statement electronically under digital signature in accordance,
(c) furnishing the statement electronically along with the verification of the statement in Form 27A.
Though there exists a rule for filing TDS statements in paper form, practically, it has become redundant.
Processing of statements [Section 200A]
Finance (No. 2) Act, 2009, has introduced the system of computerized electronic processing of TDS statements filed under section 200(3) by the deductor on the same lines as the processing of Income-tax returns. Such processing of return shall be made within one year from the end of the financial year in which the statement is filed to make the following adjustments -
(i) any arithmetical error in the statement; or
(ii) an incorrect claim, if such incorrect claim is apparent from any information in the statement, for example, in respect of rate of deduction of tax at source where such rate is not in accordance with the provisions of the Act
After making adjustments, tax and interest [e.g. u/s 201(1A)] would be calculated and sum payable by the deductor or refund due to the deductor will be determined. An intimation will be sent to the deductor informing him of his tax liability or granting him the refund due.
Late fees for filing of TDS statements (Section 234E): As per section 234E, where a person fails to file the TDS return on or before the due date prescribed in this regard, then he shall be liable to pay, by way of fee, a sum of Rs. 200 for every day during which the failure continues. The amount of late fees shall not exceed the amount of TDS. The late filing fees shall be deposited before filing the TDS return. It should be noted that Rs. 200 per day is not a penalty but it is a late filing fee.
Penalty for no or delayed filing of TDS statement: Apart from late filing fees a deductor shall be liable to pay penalty under section 271H. As per section 271H, where a person fails to file the statement of tax deducted at source on or before the due dates prescribed in this regard, then assessing officer may direct such person to pay penalty under section 271H. The minimum amount of penalty that can be levied is Rs. 10,000 which can go upto Rs. 1,00,000. Penalty under section 271H will be in addition to late filing fees prescribed under section 234E.
Apart from the delay in filing of TDS statements, section 271H also covers cases of filing incorrect TDS statements. The penalty under section 271H can also be levied if the deductor files an incorrect TDS statement. In other words, the minimum penalty of Rs. 10,000 and a maximum penalty of up to Rs. 1,00,000 can be levied if the deductor files an incorrect TDS statement.
However, no penalty under section 271H will be levied in case of delay in filing the TDS statements if the following conditions are satisfied:
(i) The tax deducted at source is paid to the credit of the Government.
(ii) Late filing fees and interest (if any) is paid to the credit of the Government.
(ii) The TDS statement is filed before the expiry of a period of one year from the due date specified on this behalf.
It should be noted that the above relaxation is applicable only in case of penalty levied under section 271H for the delay in filing the TDS statement and not in case of filing incorrect TDS statement.
Apart from the above relaxation, in the following two cases the taxpayer can get relief from the penalty under section 271H:
Under section 273A(4) the Principal Commissioner of Income-tax or Commissioner of Income-tax has the power to waive or reduce the penalty levied under the Income-tax Act. Penalty can be waived or reduced by the Commissioner of Income-tax if the conditions specified in section 273A(4) in this regard are satisfied.
Apart from the shelter of section 273A(4), section 273B also provides immunity from the penalty in genuine cases. As per section 273B, penalty under section 271H will not be levied if the taxpayer proves that there was a reasonable cause for failure.
No requirement to file TDS Returns (Section 206): From April 1, 2005, the requirement of filing of TDS returns have been dispensed with. As per new requirement, a deduction is required to file quarterly TDS statements as mentioned above from April 1, 2005.
What is the time-limit to issue the TDS Certificates
Every deductor deducting TDS under section 194C is duty-bound to furnish a TDS certificate to the deductees or payees in the prescribed time and in the prescribed form verified in the prescribed manner. [Section 203]
Rule 31(3) of Income Tax Rules, 1962 provides for the issuance of TDS certificates for payment to contractors under section 194C in Form 16A and the same is required to be issued quarterly within 15 (fifteen) days from the due date for furnishing the statement of tax deducted at source under Rule 31A.
The due dates for issue of TDS certificates in Form 16A are thus as given below-
The TDS certificates shall be issued after generating and downloading the same from the TRACES portal and can be issued with manual seal and signature or with digital signature. [Refer Circular No. 03/2011 dated 13.05.2011]
Penalty for delay in issuance of TDS certificates
Under section 272A, a penalty of Rs. 100 per day for each day of default shall be payable in case there is any delay in the issue of TDS certificates. The penalty shall begin from the expiry of the due date of furnishing the TDS certificates and shall continue till the date of actual issue of the TDS certificates.
Interest for Non-deduction of TDS or delay in payment of TDS
There can be two situations where interest is payable under the provisions of TDS.
One is for non-deduction of TDS from the payments made to the contractors.
The other one is for non-payment of tax deducted from the payment made to contractors to the credit of the central government.
As per section 201, if any person who is liable to deduct tax at source does not deduct it or after so deducting fails to pay, the whole or any part of the tax to the credit of the central government, then, such person, shall be liable to pay simple interest as given below:
(i) Interest shall be levied at 1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax was deducted.
(ii) Interest shall be levied at 1.5% for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax was actually deposited to the credit of the Government.
In other words, interest will be levied at 1% for every month or part of a month for delay in deduction and at 1.5% for every month or part of a month for delay in remittance after deduction.
Interest in case no tax is deducted by the deductor but deductee pays the tax
As per section 201, a deductor who fails to deduct the whole or any part of the tax at source is treated as an assessee-in-default. However, the payer who fails to deduct the whole or any part of the tax on the payment made to a deductee (whether resident or non-resident) shall not be deemed to be an assessee-in-default in respect of tax not deducted by him, if the following conditions are satisfied:
(i) The recipient has furnished his return of income under section 139.
(ii) The recipient has taken into account the above income in its return of income.
(iii) The recipient has paid the taxes due on the income declared in such return of income.
(iv) The recipient furnishes a certificate to this effect from a Chartered Accountant in Form No. 26A.
In other words, in case of non deduction of tax at source or short deduction of tax, in case of a deductee, if all the conditions are satisfied, then the deductor will not be treated as an assessee-in-default. However, in such a case, even if the deductor is not treated as an assessee-in-default, he will be liable to pay interest under section 201(1A). In this case, interest shall be payable from the date on which such tax was deductible to the date of furnishing of return of income by such deductee. Interest in such a case will be levied at 1% for every month or part of the month.
Filing of TDS statement after payment of interest
As stated above, every deductor has to furnish quarterly statements in respect of tax deducted by him. As per section 201(1A), interest for delay in payment of TDS to the credit of the government should be paid before filing the TDS statement.
Interest for non-payment of tax amount as per demand notice
As per section 220(1), when a demand notice under section 156(1) has been issued to the taxpayer for payment of tax (other than notice for payment of advance tax), then such amount shall be paid within a period of 30 days of the service of the notice. In certain cases, the above period of 30 days can be reduced by the tax authorities with the approval of designated authorities.
Section 220(2) deals with payment of interest in case of failure to pay tax within the time specified in the demand notice. As per section 220(2), if the taxpayer fails to pay the amount specified in any notice of demand issued under section 156(1) within the period as allowed in this regard, then he shall be liable to pay simple interest at 1% for every month or part of a month. Interest shall be levied for the period commencing from the day immediately following the end of the period mentioned in the notice and ending with the day on which the amount is paid.
After processing of TDS statements (as per section 200A) an intimation is generated specifying the amount payable or refundable. Such intimation shall be deemed as notice of demand under Section 156. Failure to pay such tax specified in intimation shall attract interest under Section 220(2).
It is provided that where interest is charged under sub-section (1A) of section 201 on the amount of tax specified in the intimation issued under sub-section (1) of section 200A for any period, then, no interest shall be charged under Section 220(2) on the same amount for the same period.
Disallowance of expenditure on failure to deduct tax or deposit the tax after deduction
Apart from interest and penalty for non-deduction of TDS from the dividend distribution/payments, there is one more consequence that the deductor will face under the Income Tax Act, 1961.
Section 40(a)(ia) provides for disallowance of business expenditure in respect of payments made to the residents on which no tax is deducted or after deduction of tax, the same is not paid to the government.
From AY 2015-16 and onwards, section 40(a)(ia) of the Income Tax Act has been amended to provide that in case of non-deduction of tax at source or non-payment of tax so deducted on payments made to residents, the disallowance shall be restricted to 30% of the amount of expenditure claimed.
Prior to AY 2015-16, whole of the amount of such expenditure claimed was disallowed for the purposes of computing income under the head "Profits and gains of business or profession".
Under section 40(a)(ia) of the Act, in case of payments made to resident, the deductor is allowed to claim deduction for payments as expenditure in the previous year of payment, if tax is deducted during the previous year and the same is paid on or before the due date specified for filing of return of income under section 139(1) of the Act. Hence, the deduction of 30% of the amount of disallowed expenditure shall be allowed in the previous year in which the tax so deducted has been paid on or before the due date specified for filing of return of income under section 139(1).
Section 40(a)(ia) covers all expenditure on which tax is deductible from the payments made to residents including section 194 under Chapter XVII-B of the Income Tax Act.
No disallowance u/s 40(a)(ia) for short deduction: In the case of DCIT vs. M/s. S. K. Tekriwal (I.T.A No. 1135/Kol/2010), ITAT Kolkata has held section 40(a)(ia) provides for a disallowance if amounts towards rent etc. have been paid without deducting tax at source. It does not apply to a case of short-deduction of tax at source. As the assessee had deducted u/s 194C, it was not a case of “non-deduction” of TDS. If there is a shortfall due to difference of opinion as to which TDS provision would apply, the assessee may be treated as a defaulter u/s 201 but no disallowance can be made u/s 40(a)(ia). [Chandabhoy & Jassobhoy (ITA No. 20/Mum/2010) (ITAT Mumbai) followed]. The decision of the Tribunal was affirmed by Calcutta High Court in ITAT No. 183 of 2012 [CIT vs. S.K. Tekriwal reported in 361 ITR 432 (Cal)]
The position of allowability of expenditure claimed which is subject to TDS can be summarized as below-
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