Cascading effect of DDT not fully addressed Saturday, March 01, 2008 Vivek Mehra, executive director, PwC

A long-standing justified demand for taxation structures being business-friendly has finally been acknowledged by the finance minister. The memorandum explaining the provisions of the Finance Bill states “With a view to help domestic companies to efficiently structure their business it has been decided to mitigate the cascading effect of Dividend Distribution Tax”. While this is a very welcome step and shall particularly help the infrastructure sector and many other business sectors which require multi-tiered structures, the proposed amendments are half-hearted and shall not have the full intended effect due to the same being restricted to only two tiers i.e., from a subsidiary to its parent provided the parent is not a subsidiary of another company. The proposed sub-section 1A to sub-section 115O stipulates that DDT shall not be payable on any dividend distributed by a domestic company during the financial year if such domestic company has received dividend during the said financial year and the following conditions are fulfilled :(a) The dividend is from its subsidiary company(b) Such subsidiary has paid DDT on the dividend distributed(c) The dividend paying/domestic company is not a subsidiary of another company The above provisions will, therefore, not mitigate the cascading effect of DDT in the following cases:(a) In case the operating company distributing the dividend to the holding company is not owned more than 50% by its holding company. If the parent company is in turn held more than 50% by another company, then also the DDT exemption will only be available at the top tier.(b) In case the parent company in turn is held more than 50% by another company, the DDT exemption will be available only at the top tier.(c) An SEZ developer company distributing dividend to its parent company and the parent company distributing further dividend since the SEZ developer company would not have paid any DDT. A look at any infrastructure group, be it in the roads, ports, airports, telecom and power would have 3-4 layers of subsidiaries starting from promoter holding companies to listed holding flagship holding companies, to sectoral holding companies with operating companies below for each project. In many countries, the system of “franked dividend” is followed and once tax has been paid the consequent franked dividend is not taxed again. This was a simple way of mitigating the recognised problem. We hope the FM will recognize this and amend the proposals to provide a true mitigation of DDT by exempting DDT on any subsequent distribution of dividend up the chain. This will truly enable Indian businesses to structure themselves efficiently to be competitive in the global environment.[From Internet]