The Budget has plugged a few loopholes that enabled unscrupulous corporate tax payers to avoid tax.
Treatment of loans to shareholders or other entities:
At present, if a loan or advance is given by a company to a shareholder or to an entity in which such a shareholder has significant interest, it is taxed in the hands of the recipient as ‘deemed dividend’. On the other hand, in the normal course, when dividend is distributed, the dividend-paying company pays a DDT (the rate as per Budget proposals is 20.56%).
“If the recipient had a loss, the deemed dividend would be offset against such loss, mitigating the tax liability,” explains Abhishek Goenka, partner and direct tax head at PwC India.
In those cases, where the loan was given to an entity in which the shareholder had a significant stake, an issue arose on whether it should be the shareholder who should be taxed or the entity receiving the loan.
The government has sought to prevent camouflaging of dividend in various ways such as via loans and advances and also end litigation.
The Budget proposes that loans and advances to a shareholder or to an entity in which the shareholder is interested, will be subject to DDT. This tax will be payable by the company and not by the shareholder or receiving entity, adds the explanatory memorandum.
However there is a catch. Pranav Sayta, tax partner at EY India, says, “It must be noted that the levy of dividend distribution tax is at a higher rate of 30%.”
Curbing abuse in case of amalgamations:
There were instances where a large company, having huge accumulated profits, amalgamated into a smaller company that had little or no profits.
This was done to avoid payment of tax on distribution of profits by the large company. The Budget proposals provide that the accumulated profits of the amalgamated company shall include the profits of the amalgamating company (i.e. the large company).
“Some companies adopted skewed plans to escape DDT. With these moves, the tax authorities are attempting to close the debate on any transaction that lacks substance or warrants debate,” said Girish Vanvari, partner and tax leader at KPMGIndia.