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The Finance Act 2013 has amended section 115-O of the Income tax Act. As per this amendment, the dividend distribution tax (DDT) to be paid will be reduced, among other matters, by the amount of dividend, if any, received from its foreign subsidiary if the domestic/ recipient company has paid tax u/s. 115BBD on such dividend.
An illustration is provided below. A domestic company received dividend of Rs. 100 from its foreign subsidiary and paid tax u/s. 115BBD of the Act. Later, but within the same financial year, it is distributing dividend of Rs. 300 to its shareholders. For simplicity, it is assumed that tax rate applicable on both the distributions is 15%. Given below is an computation of DDT in pre and post Finance Act 2013 scenario:
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Particulars
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Pre-Finance
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Post-Finance
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Act 2013
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Act 2013
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Dividend received from for-
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100
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100
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eign subsidiary
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Tax u/s. 115BBD of the Act
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15
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15
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@ 15%
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Dividend distributed
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300
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300
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Less: dividend received from
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–
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100
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foreign subsidiary
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Amount liable to DDT
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300
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200
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DDT @15%
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45
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30
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In the Pre-Finance Act 2013 scenario under Indian GAAP, companies charge tax paid u/s. 115BBD, being tax paid on dividend income, as current tax to the statement of profit and loss (P&L). DDT paid u/s. 115-O is charged to P&L Appropriation account.
Query
In the Post-Finance Act 2013 scenario, how should a company account for tax paid of Rs. 15 u/s. 115BBD of the Act? Is this a tax paid on foreign dividends received (and hence charged to P&L A/c as current tax) or it is a payment of DDT (and hence charged to P&L Appropriation A/c)?
Author’s Response
View 1
The first argument is that the company continues to pay tax u/s. 115BBD of the Act which is charged to P&L A/c. The offset allowed in the recent amendment results in lower DDT to be paid. Therefore, under this view, current tax charge would be Rs. 15 charged to P&L A/c and DDT to be adjusted against P&L Appropriation A/c would be Rs. 30.
View 2
The second argument is that through the offset mechanism, the company is entitled to claim refund of the tax paid u/s. 115BBD of the Act. Hence, if the company believes that it will be able to use the benefit of tax paid by reducing the DDT, it should not charge the same to P&L. Rather, it should recognise the same as a separate asset. The said asset will get realised at the time of dividend distribution to its shareholders. A company will be able to recognise such asset only if it can demonstrate that distribution of dividend is reasonably certain and it will be able to utilise the credit (under the Act the utilisation should happen within the same financial year). According to this view, the current tax charge would be Nil and DDT to be adjusted against P&L Appropriation A/c would be Rs. 45.
A strong argument in support of View 2 is that the intention of the law is to provide relief on the cascading effect of tax. The intention is to fix the income tax charge on the company based on the ultimate dividend outflow to the shareholders. Therefore per se there is no relief with regards to DDT, but the relief is with respect to dividend income earned by the company, provided they are in turn distributed to ultimate shareholders.
Conclusion
The author believes that the issue is debatable and that both views are possible, for the reasons mentioned above. When View 2 is applied, a note, drafted as follows, could be included in the financial statements: “Current tax charge excludes income-tax paid u/s. 115BBD of the Income-tax Act, since it has been used as a set-off against payment of DDT.”
To achieve the objective of comparability, the Institute should publish its’ view on AS 22 – Accounting to taxes on income.
