Section 123 of the Companies Act, 2013 deals with provisions relating to dividend. The board of directors of the company usually recommends the dividend, which is, approved by the Members of the Company. There are 2 types of dividend final dividend and interim dividend. Final dividend is announced at the end of financial year and is approved by the members of the Company at its Annual General Meeting. However, interim dividend is declared between 2 Annual General Meetings and requires approval of the Board of directors of the Company.
The dividend is declared when
- In case the dividend is final dividend when the members of the company approve it.
Dividend can only be approved by the members of the company at an annual general meeting of the Company. As per Secretarial standards III, an extra ordinary general meeting cannot be held to approve dividend.
Dividend shall be issued out of the profits of the company including any money provided by the central government or state government for the same purpose except the following:
- If in the profits for the current year or previous years the depreciation is not provided for
- The amount in computing profits has been taken after taking into consideration of unrealized gains, notional gains or revaluation assets.
Tax implications on dividend-
As per Section 2(22) of the Income-tax Act, the dividend shall also include the following:
(a) Distribution of accumulated profits to shareholders entailing release of the company’s assets;
(b) Distribution of debentures or deposit certificates to shareholders out of the accumulated profits of the company and issue of bonus shares to preference shareholders out of accumulated profits;
(c) Distribution made to shareholders of the company on its liquidation out of accumulated profits;
(d) Distribution to shareholders out of accumulated profits on the reduction of capital by the company; and
(e) Loan or advance made by a closely held company to its shareholder out of accumulated profits.
Tax implications on the company –
Up to the assessment year 2020-2021, a company-distributing dividend shall be required to pay DDT as per section 115-O of the Income Tax Act, 1961.however section 115-O is not applicable if the company pays dividend on or after 01.04.2020. An Indian company shall deduct tax at the rate of 10% from dividend distributed to the resident shareholders if the aggregate amount of dividend distributed or paid during the financial year to a shareholder exceeds Rs. 5,000. No tax shall be required to be deducted from the dividend paid or payable to Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC) or any other insurer in respect of any shares owned by it or in which it has full beneficial interest.
Tax implications on the shareholder-
Section 10(34), which provides an exemption to the shareholders in respect of dividend income, is withdrawn from Assessment Year 2021-20. If dividend is received during the financial year 2020-21 and onwards shall now be taxable in the hands of the shareholders. If the shareholder is a trader then dividend received shall be taxable under the head business income otherwise in the head of income from other sources. In case of a non-resident shareholder, the provisions of Double Taxation Avoidance Agreements (DTAAs) and Multilateral Instrument (MLI) will apply. Section 8 of the Act provides that final dividend including deemed dividend shall be taxable in the year in which it is declared, distributed or paid by the company, whichever is earlier. Whereas, interim dividend is chargeable to tax on receipt basis.
Domestic co. receives dividend from another domestic co.-
The provisions of section 80M provides that inter- corporate dividend shall be reduced from total income of company receiving the dividend if same is further distributed to shareholders one month prior to the due date of filing of return.
Domestic co. receives dividend from a foreign co.-
Dividend received by a domestic company from a foreign company, in which such domestic company has 26% or more equity shareholding, is taxable at a rate of 15% plus Surcharge and Health and Education Cess under Section 115BBD. Such tax shall be computed on a gross basis without allowing deduction for any expenditure.
Dividend received by a domestic company from a foreign company, in which equity shareholding of such domestic company is less than 26%, is taxable at normal tax rate. The domestic company can claim deduction for any expense incurred by it for the purposes of earning such dividend income.
Practical insights on issuing dividend –
- Can the members recommend a rate higher than what is being recommended by the board of directors of the company?
The members have the authority to lower the rate of dividend and the rate specified by the members cannot exceed what the members are prescribing.
- If there is default in re-payment of deposit or any other rules as prescribed . Whether Dividend can be declared?
No, a company shall not declare dividend if there is non-compliance under the deposits rules made thereunder.
- Whether dividend can only be paid to the member?
The dividend can be paid to members or by their order thereof.
- Can dividend be revoked after its declaration?
No, once it is declare dividend cannot be revoked.
- What are the conditions for declaring dividend?
- Rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year.
- The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement.
- The amount so drawn shall first be utilized to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared
The balance of reserves after such withdrawal shall not fall below fifteen per cent of its paid up share capital as appearing in the latest audited financial statement.