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Given below are two statements. One is labelled as Assertion (A) and the other is labelled as Reason (R).  Assertion (A): Tax should not be charged on dividend income from the shareholders  Reason (R): Some economists are of the opinion that when tax has already been paid on the profit of the company and balance is distributed as dividend to the owners, tax need not be levied on them  In the light of the above two statements, choose the correct answer from the options given below  1. Both A) and R) true and R) is the correct explanation of A) 2. Both A) and R) true but R) is NOT the correct explanation of A) 3. A) is true but R) is false  4. A) is false but R) is true

Given below are two statements. One is labelled as Assertion (A) and the other is labelled as Reason (R).  Assertion (A): Tax should not be charged on dividend income from the shareholders  Reason (R): Some economists are of the opinion that when tax has already been paid on the profit of the company and balance is distributed as dividend to the owners, tax need not be levied on them  In the light of the above two statements, choose the correct answer from the options given below  1. Both A) and R) true and R) is the correct explanation of A) 2. Both A) and R) true but R) is NOT the correct explanation of A) 3. A) is true but R) is false  4. A) is false but R) is true Correct Answer 1

Assertion (A): Tax should not be charged on dividend income from the shareholders

Explanation:

  1. The dividend is the amount received by an investor, whether it's an individual or HUF, on account of holding shares in a company. In simple words, it is the distribution of profits of the company to its shareholders.
  2. The tax on dividends received from domestic companies is deducted at the rate of 15%. The tax is deducted and paid by the company, so the dividend received in the hands of the shareholder is fully exempt.
  3. Dividend Distribution Tax is required to be paid by the company before actually paying or distributing the dividend. The dividend that shareholders received is after deducting the tax, which makes the amount in their hands tax-free.
  4. Hence, Tax should not be charged on dividend income from the shareholders.

Therefore, Assertion (A) is the correct statement.

Reason (R): Some economists are of the opinion that when tax has already been paid on the profit of the company and the balance is distributed as a dividend to the owners, tax need not be levied on them 

Explanation:

  1. Until 2019, In India, a company that has declared, distributed, or paid any amount as a dividend is required to pay a dividend distribution tax at 15%.
  2. The provisions of DDT were introduced by the Finance Act 1997.
  3. Only a domestic company is liable for the tax.
  4. Domestic companies have to pay the tax even if the company is not liable to pay any tax on their income.
  5. It is applicable whether it is paid out of current or accumulated profits.
  6. If the dividend holder also pays tax on the dividend it will result in a cascading effect.
  7. Hence, Some economists are of the opinion that when tax has already been paid on the profit of the company and the balance is distributed as a dividend to the owners, tax need not be levied on them 

Therefore, Reason (R) is the correct statement, and R) is the correct explanation of A).

  • In a move that will offer some relief to India Inc., the Narendra Modi-led government eliminated the dividend distribution tax that is levied on dividends issued by companies.
  • Dividend income will now be taxed only in the hands of investors as per the tax rate applicable to their income, Finance Minister Nirmala Sitharaman announced in her Union Budget 2020 speech.

Related Questions

Given below are two statements. One is labelled as Assertion (A) and the other is labelled as Reason (R).
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Reason (R): Some economists are of the opinion that when tax has already been paid on the profit of the company and balance is distributed as dividend to the owners, tax need not be levied on them.
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