Double Taxation in India
Double Taxation refers to levy of tax twice on the same income.
Let us understand this with an example.
You own a stock of a public company. The company earns Revenue of Rs.1000.
After deducting all expenses, the Profit before Tax (PBT) comes at Rs.100.
Now the company being a separate legal entity, is liable to pay tax on the profits.
Say for example, the Corporate tax rate is 25%.
So on a profit of Rs.100, the company pays Rs.25 as tax, and Profit after Tax (PAT) comes at Rs.75.
To keep it simple, let us assume the company distributes the whole amount of Profit i.e., Rs.75 to shareholders in form of Dividend.
Now, even at personal level, say shareholders are liable to pay tax on income from dividend at the rate of 10%.
So on Rs.75, at the rate of 10%, Rs.7.5 is paid in form of taxes.
The final amount of Profit left comes at Rs.67.5.
What happened here?
The same amount of Rs.100 got taxed twice, first at corporate level and then again at personal level.
Thus the effective tax rate on Rs.100 comes out to be 32.5%.
Solution to double Taxation
Depending on different jurisdictions, there is a Provision of tax credit for investors in order to nullify the effect of double Taxation.
What happens in India?
If we talk about India, the company is liable to withhold tax at the rate of 10% before payment of Dividend to a resident shareholder if the amount of Dividend exceeds Rs.5000.
However if the resident shareholder's total income does not exceed the basic exemption limit, the person can claim the TDS refund on Dividend at the time of filing income tax return.
#doubletaxation #tax #dividend #india #economy
Social Plugin