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Section 2(22)(e) of Income Tax

Income tax is all about tax on your income. The word dividend means return earned by a shareholder for investing in a company by purchasing its shares.

The dividend is a branch of Income Tax that deals with the loan provided by the company to its shareholders. The concept of dividend is a term related to company entities in which the common people show very less interest. Section 2(22)(e) of Income Tax works based on dividend theory. Under the Income Tax Act, Dividend includes any type of income irrespective of any big company. This article will help you to learn about the effect of section 2(22)(e) on Income tax.

What is Deemed Dividend?

The meaning dividend means the returns a shareholder receives for investing in a company.

For example, let us say that Company ‘A’ is making sound quantities of total income and needs to distribute the earnings to its shareholders. The board of the company decides to supply 3% returns per share to each shareholder. Each share unit requires a fee of ₹100, and every share of the shareholder receives ₹30. This quantity is called a ‘Dividend’. The deemed dividend is a precise quantity or asset loaned to a shareholder who has a sizable share in that company, and for this reason of taxation, the loaned amount is called a ‘deemed dividend. The asset or development quantity ought to solely be supplied from the collective earnings of the company. It is referred to that alone personal constrained corporation whose activities are no longer of public’s sizable hobby are eligible for Deemed Dividend.

Applicability

Section 2(22)(e) of the Income Tax is an official order that the deemed dividends are loans or advances extended by a company, which are closely related to the following people:

  • The beneficial share of individuals had a minimum of 10% of voting rights to them. It can also be possible that shareholders do not have any fixed dividends.
  • The shareholders of the companies are members or partners holding a substantial interest.
  • It provides the upper hand for shareholders to the extent of specified law.

Income Tax Implications

Before 1st April 2018, the companies that payout deemed dividends would not need to pay any DDT on such payments. After 1st April 2018, it was made mandatory to repay a DDT amount of around 30% on transactions. This amendment came into action because the taxability of deemed dividends in the hand of recipients made tax collection difficult for the shareholders. Due to this, shareholders do not need to pay any tax on these receipts. In the budget for 2021, the burden from paying tax is transferred from the company to individual shareholders. Now the companies are not responsible for paying tax on Dividend Distribution Tax while distributing the dividends to the shareholders.

Use the Income tax calculator on Vakilsearch to quickly calculate your taxes and submit your ITR.

Taxability

  • Dividend income would experience tax in the year of declaration/distribution/payments. Shareholders did not need to pay any tax on the dividend which they get from the company. Dividend Distribution Tax gets removed from income tax. This theory did not apply to dividends, whereas shareholders need to pay some marginal tax on them. This theory got changed on 1st April 2020, after that there is no need of giving a dividend distribution tax at the time of giving dividends. This provided relief to the company owners from financial burden and compliance burden. 
  • Dividend Distribution Tax (DDT) means the income tax paid by a corporation on the dividends disbursed to members. In the Union Budget introduced on 1st February 2020, the Finance Minister introduced that with impact from 01.04.2020, DDT would no longer be applicable. The tax on dividends would be paid only by the individual investors. Due to this, the Government has shifted the burden of dividend taxation from organizations to individuals.
  • DDT is a levy of tax that is relevant in addition to the ordinary income tax. All Indian businesses are required to pay DDT. The legal responsibility to pay DDT does now not extend to an overseas company. The applicability of DDT will keep correct whether or not the dividend quantity is declared, distributed, or paid. DDT applies to each intermediate and final dividend. The legal responsibility for DDT ought to be met whether or not DDT is paid out of current earnings or amassed profit. There are legal responsibilities for DDT that can be neglected, in case the assessee is a Special Economic Zone (SEZ), Pension Trust, or International Financial Services Centre (IFSC). 
  • The Government of India has meditated on taking measures to ensure the levy of Dividend Distribution Tax (DDT) on the deemed dividend at the price of 30% in the arms of the intently held groups to dissuade them from hiding dividends in the structure of loans or advances. As deemed dividend under section 2(22)(e) ought to doubtlessly be protected underneath the purview of DDT, the exemption supplied for the latter would be relevant to shareholders, and the unique deemed earnings will no longer be included in the concern of tax.

Exemptions

As per the new rules of the Income-tax Act, the following types of transactions would not need to pay tax under this rule. 

  • Transaction for advance or loan is made in the regular direction of motion in an enterprise the place cash lending performs a considerable role. However, such an enterprise can solely be operated with an RBI license (except for NBFCs).
  • Subsequent dividends were paid by the way, of a corporation to the extent of set-off in opposition to any loan or payment previously handled as a dividend. However, such a dividend is taxable if it is no longer set off.
  • The payments are made through a business enterprise with the object of purchasing back their shares.
  • Some companies started giving their shares to shareholders of the demerged company.
  • Inter-corporate deposits.

Determining Conditions

There are the following conditions that determine the taxability of dividends:

  • While the receiving organization can be public or listed, the paying corporation must no longer be a closely held company.
  • The loans or advances so prolonged with the treatment of the organization should no longer be in the everyday direction of the business.
  • The shareholder should have assigned the employer as a creditor.
  • The dividend would solely be acted as, to the extent of collected earnings of the enterprise (accumulated income refers to all the industrial income of an employer up to the date of distribution/payment/liquidation).

Conclusion

Now many company owners feel relaxed as the burden of paying tax on dividends is shifted to individuals. They all need to pay a tax of around 30% on their dividend. It is beneficial for all the closely held companies with the shareholders. For more information related to this topic, get in touch with the legal experts of Vakilsearch

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