- April 20, 2020
- Posted by: IBA LLP
- Category: Articles, Others
This article aims to:
Explain the manner of presentation of DDT under Ind-AS.
One of the usual methods of giving out profits to shareowners is by way of declaring dividends (both interim and final). Dividend is an income for shareowners and as per Section 115-O of the Income Tax Act, 1961 (IT Act), a corporation declaring dividend has to discharge Dividend Distribution Tax (‘DDT’) on the amounts distributed as dividends.
Indian Accounting Standard (Ind-AS) 12, Income Taxes stipulates the accounting for income tax consequences of dividends i.e. DDT.
The issue was elevated to the International Accounting Standards Board (IASB) whether the income tax consequences of payments on financial instruments classified as equity should be recognised in profit or loss or in equity. To sort out the issue, IASB amended International Accounting Standard (IAS) 12, Income Taxes and consequently MCA amended Ind-AS 12 and amendments are applicable for accounting periods beginning on or after 1 April 2019.
Accounting guidance :
Ind AS 32, Financial Instruments: Presentation gives guidance w.r.t. categorisation of a financial instrument as a financial liability or an equity instrument. This categorisation determines whether dividend relating to that instrument is recognised as income or expense in the Statement of Profit and Loss.
Thus dividend relating to a financial liability or a component that is a financial liability would be recognised as an expense in the statement of profit and loss and distributions to holders of an equity instrument should be recognised directly in equity.
The recent Ind-AS 12 amendment requires company to ‘recognise the income tax consequences of dividends in profit or loss, Other Comprehensive Income (OCI) or equity according to where the company originally recognised those past transactions or events’.
Before amendment to Ind-AS 12, the requirement regarding income tax consequences of dividends was debatable. It was not clear whether the requirements of paragraph 52B of Ind AS-12 before amendment apply only in the situations described in paragraph 52A – for example, when there are different tax rates for distributed and undistributed profits or whether those requirements apply as long as payments on financial instruments classified as equity are distributions of profit.
The amendment therefore clarifies that all income-tax consequences of dividends (including payments on financial instruments classified as equity) are recognised consistently with the transactions that generated the distributable profits- i.e. in profit or loss, OCI or equity.
Presentation of DDT :
Ind-AS 12 (amended) requires companies to recognise DDT in the same place where the underlying transaction or event was recognised. Therefore as a first step companies need to analyse the terms and conditions of the financial instruments issued by them to determine if such instruments should be classified as liability or equity in accordance with the guidance provided under Ind-AS 32. The classification of financial instruments is likely to involve significant judgement.
On 17 September 2019, the Accounting Standards Board (ASB) of ICAI also released FAQs and clarified the presentation of DDT as DDT is a unique feature of India tax regime. The ASB referred to paragraph 65A of Ind-AS 12 which is given below:
‘when an entity pays dividends to its share owners, it may be required to pay a portion of the dividends to taxation authorities on behalf of share owners. In many jurisdictions, this amount is referred to as a withholding tax. Such an amount paid or payable to taxation authorities is charged to equity as a part of the dividends’.
The term ‘withholding tax’ is neither defined in Income-Tax Act nor under Ind-AS.
As per the ASB, withholding tax is only an example of tax collection mechanism envisaged by Ind-AS 12 Therefore, ASB opined that the standard does recognise possibility of other tax collection mechanisms, which have to be interpreted keeping in mind the substance and underlying intent of tax laws of the country. Accordingly, the ASB considered following two indicators to evaluate whether DDT is a portion of tax paid by company on behalf of its shareowners:
1. Dividend received with an imputed tax credit:
As per the ASB, dividend is received by the shareowners in India with an imputed tax credit i.e. it will not be charged to further tax by the taxation authorities in the hands of shareowners. Therefore, DDT is covered by situation of paragraph 65A as per ASB.
Further, it is of the view that in India, dividends are not taxable in the hands of shareowners as DDT is paid by the company that paid the dividend. According to ASB, had there been no DDT mechanism, dividend would have been taxable in the hands of recipients (though dividend exceeding specified limit has been made taxable under Section 115BBDA of the IT Act through Finance Act, 2016 with effect from 1 April 2017). In such a situation also, the tax applicable is at a lower rate in view of the fact that tax on dividend has already been collected in the form of DDT.
2. Receipt of net/full amount of dividend declared and ‘grossing up’ of DDT:
As per ASB, in India, the amount of dividend is grossed up by the company for computation of DDT and shareowners receive a net amount of the dividend after deducting tax.
It highlighted that DDT mechanism was introduced to replace the mechanism of Tax Deduction at Source (TDS) (commonly referred to as withholding tax) primarily to reduce the operational difficulties involved in that tax collection structure. Also, the Finance Act, 2014 brought the concept of ‘grossing up’ of base amount used for computing DDT. As per ASB, the intention behind introduction of grossing up was to bring the tax base equivalent to the tax base on which tax would have been collected if the dividends were taxable in the hands of shareowners.
Based on the above, the ASB concluded that DDT is a portion of the dividends paid to taxation authorities on behalf of its shareowners. Therefore, DDT in substance is payment by the company on behalf of the shareowners and thus, will be covered under paragraph 65A of the IT Act.
With respect to presentation of the DDT, the ASB is of the view that the relevant guidance is in paragraph 61A of Ind AS 12. Para 61A states that ‘current tax and deferred tax shall be recognised outside profit or loss if the tax relates to items that are recognised, in the same or a different period, outside profit or loss.
Accordingly ASB clarified that the presentation of DDT paid on dividends should be consistent with the presentation of the transaction that creates those income tax consequences, as follows:
- Dividend charged to statement of profit and loss: Charge DDT to Statement of Profit and Loss.
- Dividend recognised in statement of changes in equity: Recognise DDT in the statement of changes in equity.