Taxation of dividend

Change in dividend taxation regime

under Finance Act, 2020
May 2020

With effect from 1 April 2020, the erstwhile dividend distribution tax
(DDT) has been abolished and the dividend income is now taxable in
the hands of shareholders.
The Finance Act, 2020 has brought about a significant The classical system of taxation of dividend in the
amendment in the taxation of dividend by abolishing hands of shareholders has now been reintroduced.
the imposition of DDT. Under the erstwhile DDT With effect from 1 April 2020, dividend is taxable in
regime, taxes on dividend were to be paid by the the hands of shareholders and companies declaring
dividend distributing company at the rate of 20.56 dividend are required to withhold taxes thereon.
per cent and the dividend income was exempt from
taxation in the hands of shareholders.

Snapshot of change in the

dividend tax regime

Removal of
Withholding
cascading Deductibility
Applicability tax
effect of expenses
requirement

• 10 per cent • Dividend received • Only interest

• DDT abolished for resident by a domestic expense allowable
shareholders company allowed as deduction
• Dividend
(reduced to 7.5 as deduction from against dividend
income taxable
per cent in case its gross total income subject
in the hands of
dividend is paid or income to cap of 20 per
shareholder at
credited during the cent of dividend
applicable tax • Deduction allowed
period from 14 May income received
rates. to the extent that
2020 to 31 March by resident
such dividend is
2021) shareholders.
distributed by the
• 20 per cent (plus domestic company
surcharge and up to one month
cess) or treaty rate, prior to the due
whichever is lower, date of filing of
in case of non- income tax return.
residents, except
in case of Foreign
Portfolio Investors.
 DIVIDEND

Challenges Opportunities
• Better cash flow for dividend distributing
• Significant withholding tax compliance for company
dividend distributing companies • Overall reduction in repatriation cost
• Satisfaction of treaty entitlement conditions, of dividend payable to non-resident
including tax residency, beneficial ownership shareholders
and other anti-abuse provisions • Tax credit may be available in home country
• Computational challenges around interplay for non-resident shareholders.
of deduction under section 80M and interest
allowance under section 57
• Tax return filing obligation for shareholders.

Key facets of transition to the new dividend

tax regime
Non-resident shareholders
• Determine eligibility under treaty based on the
- Principal purpose test under multilateral
following.
instruments
- Tax residency status
- Interplay of general anti-avoidance rules
- Beneficial ownership test and substance
- Threshold and period of shareholding
requirements
• Withholding tax rate for foreign portfolio
- Availability of benefit under most favoured
investors.
nation clause

Listed companies

• Set process for withholding tax compliance in • Manage shareholders’ expectation to limit the
case of listed companies withholding tax as per treaty rates
• Mapping of shareholders on record date • Changes in IT system
• Develop standard formats for obtaining • Liaising with registrars/share transfer agents
declaration and maintaining other documentation • Filing of Form 15CA/15CB.

Closely held promoter-driven companies

• Comparison of Limited Liability Partnership (LLP) • Trade-off between lower corporate tax
vs. company structure rate and dividend taxation.

Multi-tier structures

• Evaluate timing for dividend distribution in case • Leveraging elimination of cascading effect.
of multi-tier structures
 KPMG in India’s approach and
methodology
Identification Assessment Implementation Compliance
• Mapping of • Mapping the withholding • Assist in developing • Assistance in
different classes tax rates applicable for standard operating compliance with
of shareholders, resident and non-resident procedures laying withholding tax
including shareholders down the withholding obligations, including
corporates, tax process facilitating issue of
• Highlighting the relevant
individuals, Form 15CB, filing
factors for non-resident • Assist in identifying
Alternate of withholding tax
shareholders to claim the documentation
Investment Fund statements, issue
treaty benefit requirement
(AIF), Real Estate of withholding tax
confirming fulfillment
Investment • Advising on the certificates, etc.
of all applicable
Trust (REIT)/ appropriate withholding
conditions • Liaising with registrar
Infrastructure tax rate for non-resident
and transfer agents.
Investment shareholders depending • Assist in preparing
Trust (INVIT) on the treaty conditions sample declarations
and American and the documentation to be obtained
Depository Receipt provided by shareholders from non-resident
(ADR)/Global shareholders before
• Advising on ring-fencing
Depositary Receipt granting treaty
of potential exposure on
(GDR) holders benefits.
account of withholding tax
• Ascertaining their obligations.
residency status,
treaty entitlement,
etc.

While the nature and areas of assistance would be customised to your specific requirements, KPMG
in India’s tax service offerings include the following.

Case-specific Documentation Develop Work along Assistance Support on

opinion support standard side registrars/ around 15CB advocacy
operating share transfer certificates initiatives
procedures agents
to assess
appropriate tax
deduction and
deposition
KPMG in India contacts:
Rajeev Dimri
National Head of Tax
T: + 91 124 307 4077
E: rajeevdimri@kpmg.com

Hitesh Gajaria
Partner
Tax
T: + 91 22 3090 2110
E: hgajaria@kpmg.com

Ajay Mehra
Partner and Head
Tax Markets and Strategy
T: +91 22 3090 2701
E: ajaymehra@kpmg.com

Himanshu Parekh
Partner and Head
Corporate and International Tax
T: +91 22 3090 2680
E: himanshuparekh@kpmg.com

Sunil Badala
Partner and Head
Banking & Financial Services
T: +91 22 3090 2100
E: sunilbadala@kpmg.com

home.kpmg/in

Follow us on:
home.kpmg/in/socialmedia

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour
to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be
accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

KPMG Assurance and Consulting Services LLP,  Lodha Excelus, Apollo Mills Compound, NM Joshi Marg, Mahalaxmi, Mumbai - 400 011 Phone: +91 22 3989 6000,
Fax: +91 22 3983 6000

© 2020 KPMG Assurance and Consulting Services LLP, an Indian Limited Liability Partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

KPMG (Registered) (a partnership firm with Registration No. BA- 62445) converted into KPMG Assurance and Consulting Services LLP (a Limited Liability partnership
firm) with LLP Registration No. AAT-0367 with effect from July 23, 2020.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

This document is meant for e-communications only. (019_FLY0520_RU)