By SR Patnaik, Bipluv Jhingan
Indian Union Budget 2021-22: One of the numerous adjustments launched by the Finance Act, 2020 was the abolishment of the Dividend Distribution Tax (“DDT”) and reinstating the classical system of taxing dividends, the place the shareholder is liable to pay tax on the dividend revenue. This change had a serious impression on the taxation of unitholders of Real Estate Investment Trusts and Infrastructure Investment Trusts (collectively referred to as “Business Trusts”), which derive a major chunk of their returns from dividends earned by the Business Trusts. Subsequently, the related stakeholders made varied representations to the Finance Minister to make clear the newly launched provisions to be sure that the brand new system of taxing dividend just isn’t very onerous for the Business Trust and buyers.
Before the Finance Bill, 2020 was enacted, the Finance Minister supplied sure relaxations to handle the issues of the Business Trust business. Though the bulk of the issues of the Business Trust business appear to have been addressed within the second set of revisions, we are attempting to revisit some of these adjustments and analyze their efficacy by way of this text.
Under the erstwhile regime, dividend distributed by a home firm was topic to DDT, within the fingers of the corporate, at an efficient charge of 20.56%. Such dividends have been typically exempt within the fingers of all shareholders, together with non-resident unitholders within the Business Trusts in India, although they might have been taxed within the residence jurisdiction of a non-resident unitholder. Further, as per erstwhile regime, dividend distributed by a particular objective automobile (“SPV”), through which a Business Trust held your complete share capital aside from as required to be held by the Government or any regulatory authority, was exempt from DDT. The dividend obtained by enterprise trusts from their SPVs was then distributed to the unitholders with none additional tax being levied on it.
Pursuant to the passage of Finance Act, 2020, dividend revenue is now instantly topic to tax within the fingers of the shareholders, on the relevant charge and the SPV is required to withhold tax on the identical. However, a Business Trust remains to be exempt from tax on dividend revenue from an SPV supplied the enterprise belief holds controlling curiosity or such share holding, as could also be prescribed. Even although the dividend revenue is exempt within the fingers of Business Trusts, no particular exemption has been granted to the SPVs from withholding tax whereas distributing publish tax income to a enterprise belief. Though it’s attainable for the Business Trust to receive a 0 withholding tax certificates, the Finance Minister may additionally incorporate acceptable carve outs within the withholding tax provisions to rationalise these provisions and to scale back pointless trouble of acquiring nil withholding certificates from the tax authorities repeatedly.
Additionally, the erstwhile regime didn’t exempt a multi-level construction (i.e. the place the enterprise belief holds shares within the SPV by way of an middleman holding firm) from the applicability of DDT. Accordingly, the dividend paid by an SPV to its holding firm was topic to DDT. However, holding corporations might declare exemption from DDT supplied your complete share capital of the holding firm was held by a Business Trust.
It is pertinent to word that Finance Act, 2020 has reintroduced part 80-M within the Income-tax Act. This part offers for a deduction for dividends obtained by one home firm from one other home firm, restricted to the quantity of dividend obtained from the investee firm if the shareholder firm pays dividend earlier than the desired due date i.e. one month prior to the return submitting date. Accordingly, below the present regime SPVs are usually not required to pay any tax on dividend distributed and the holding firm can declare the deduction from such dividend revenue to the extent of dividends distributed by it earlier than the desired date.
Under the present provisions the SPV would even be required to withhold tax on the charge of 10% on the dividends distributed by it to the holding firm. Further, related SEBI rules governing the Business Trust require holding corporations to distribute 100% of their revenue from SPVs. Thus, contemplating that the precise cash obtained by the holding firm from the SPV, after deduction of tax at supply, could be 90% of the revenue earned by it from SPV, sure holding firm might face money circulate points in complying with regulatory requirement of distributing 100% revenue, which consequently will stop such holding corporations from claiming 100% deductions of the dividends earned from the SPVs. Though this problem might not come up in conditions the place the holding corporations have ample money to meet the distribution necessities, this problem is extra seemingly to come up in newly established Business Trust buildings. Thus, Budget 2021 ought to present for appropriate amendments to handle this problem and rationalise of the present taxation provisions.
With the Finance Minister promising a publish pandemic price range ‘unlike anything in the past 100 years’, one must not lose sight of the truth that rationalising current provisions, as mentioned above, and offering certainty to taxpayers might go a good distance in selling investments within the publish pandemic world.
(SR Patnaik is Partner & Head – Taxation; and Bipluv Jhingan, Senior Associate, Cyril Amarchand Mangaldas. Views are the authors’ personal.)