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Budget 2014: DDT, Investment Allowance & TDS Defaults

Published on Fri, Jul 11,2014 | 18:47, Updated at Fri, Jul 11 at 18:47Source : Moneycontrol.com 

By: Sandeep Chaufla, Executive Director, PwC India

  • Increase in the Dividend Distribution Tax (DDT) rate effectively

Under the existing provisions of the Income-tax Act, 1961 (Act), DDT at the rate of 16.995% (including surcharge and cess) is payable on the amount of dividends actually paid to the shareholders. As an additional resource mobilization measures proposed in the Budget, DDT is proposed to be applied to the amount of dividend distributed to shareholders by grossing up the said amount. A tabular comparison of the impact current and as proposed is as under (on the assumptions that gross amount of dividend before payment of DDT is same i.e. Rs. 100):

 

 Particular  Amount (in Rs)  DDT (in Rs)
 Amount allocated for distribution to shareholders (Pre DDT)  100  
 Total Dividend payout after DDT (Pre amendment)  85.47  14.526*
 Total Dividend payout (proposed amendment)  83.00  16.995**
 Reduction in amount of Dividend actually paid to shareholders  (Rs 85.47 minus Rs 83.00) = Rs 2.47  

 

 

 

 

 

 

* worked out @16.995% of Rs. 85.47

** worked out @16.995% of Rs. 100

This effectively means that the amount of dividends actually paid to the shareholder would go down by Rs. 2.47 for every Rs 100 to be distributed to shareholder before calculating DDT. The differential amount will get passed on to the Government as additional DDT and to that extent dividend payout would be reduced. The justification from the Hon’ble FM is that prior to introduction of DDT, the dividends were taxable in the hands of the shareholder. The gross amount of dividends was taxable in the hands of shareholders at the rate varying from 0 to 30%. Under the DDT regime currently, DDT is payable on the amount paid as dividend (after reduction of distribution tax) by the company. Thus, due to difference in the base on which the distribution tax is calculated, the effective tax rate is lower than the rate provided in the section. In order to equate the base on which DDT rate is to be applied with the base prior to DDT regime, the proposal has been made. This provision is effective October 1, 2014.

  • Extending Investment Allowance to medium size investments

The Finance Act, 2013 provided that where a company is engaged in the business of manufacture of an article or thing and invests more than Rs.100 crores in new plant and machinery during the period from April 1, 2013 and March 31, 2015, it shall be allowed a deduction of 15% of cost of new assets for assessment years 2014-15 and 2015-16. The applicability of this section has now been proposed to be extended till assessment year 2017-18.

Further, proposal has been made to include medium size investments in plant and machinery also as eligible for deduction. Thus, deduction shall be allowed if the company on or after 1st April, 2014 invests more than Rs.25 crores in plant and machinery in a year. It is also clarified that the assessee who is eligible to claim deduction under the existing combined threshold limit of Rs.100 crores for investment made in financial years 2013-14 and 2014-15 shall continue to be eligible to claim deduction under the existing provisions even if its investment in the year 2014-15 is below the proposed new threshold limit of investment of Rs. 25 crore during the financial year. The impact has been analyzed in the below mentioned table:

 

Particulars

FY

2013-14

FY

2014-15

FY 2015-16

FY

2016-17

Remarks

  1.  

Amount of Investment

20

90

-

-

Under existing section 32AC(1)

Deduction allowable

NIL

 16.5

-

-

 

Amount of Investment

30

40

-

-

Under the proposed section 32AC(IA)

Deduction allowable

NIL

6

-

-

 

Amount of Investment

150

10

-

-

Under existing section 32AC(1)

Deduction allowable

 22.5  1.5

-

-

 

Amount of Investment

60

20

-

-

No deduction either under section 32AC(1) or 32AC(1A)

Deduction allowable

NIL

NIL

 

 

 

Amount of Investment

30

30

30

40

Under the proposed section 32AC(IA)

Deduction allowable

NIL

 4.5  4.5

6

 

Amount of Investment

150

20

70

20

Deduction both under section 32AC(1) and 32AC(1A)

Deduction allowable

 22.5

3

 10.5

NIL

 

  • Extension of timeline for passing of TDS default orders - section 201(1) of the Act

The Finance (No. 2) Bill, 2014 has proposed to extend the timelines to pass the order for TDS default in certain cases of payments to residents. A comparative chart of these time lines over various time periods is as under:

 

Time line during the period

Pre April 1, 2010

April 1, 2010 to September 30, 2014

From October 1, 2014 onwards (proposed)

There was no timeline provided in the Act. However, Courts in various cases held that limitation period of 4 years / 6 years should be applied.

The section was amended to include the timeline as under:

  • 2 years from the end of the financial year in which quarterly TDS statement was filed;
  • Where quarterly statement was not filed - 6 years from the end of the financial year in which payment is made or credit is given.

 

(However, it was provided that an order for a financial year commencing on or before April 1, 2007 could have been passed at any time on or before March 31, 2011)

7 years from the end of the financial year in which payment is made or credit is given

 

The justification from FM is that there is no rationale for not passing an order after two years only on the basis that the deductor has filed TDS statement as TDS defaults are generally in respect of the transaction not reported in the TDS statement. Further, order under section 201(1) of the Act cannot be passed in respect of TDS defaults coming to the notice during search / reassessment proceedings unless the time lines are extended.

(With inpute from Prabhat Lath, Associate Director - Tax and Regulatory Services, PwC India)

 
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