Shares Issued for Full Cash Consideration Under Dividend

Shares Issued for Full Cash Consideration Under Dividend

When a company issues shares for full cash consideration under dividend, it is important to understand the tax implications of such transactions. In the context of income tax in India, certain provisions and rules govern the tax treatment of shares issued for full cash consideration under dividend. This article aims to provide a comprehensive understanding of these provisions, ensuring accuracy, clarity, and compliance with legal principles.

Legal Provisions

Under the Income Tax Act, 1961, dividend is defined in Section 2(22) as a distribution of any accumulated profits by a company to its shareholders out of its earnings. It includes a payment by a company, on purchase of its own shares, through the issuance of bonus shares, and a distribution to its shareholders on the liquidation of the company.

The issuance of shares for full cash consideration under dividend falls within the purview of Section 2(22) of the Income Tax Act, and therefore, the tax treatment of such transactions is subject to the provisions of this section.

Tax Treatment of Shares Issued for Full Cash Consideration Under Dividend

1. Tax Implications for the Company:

   When a company issues shares for full cash consideration under dividend, it is considered as a distribution of accumulated profits to its shareholders. As per the provisions of Section 2(22), such distribution is subject to dividend distribution tax (DDT) at the hands of the company.

   The DDT is levied at the prescribed rate, currently at 15% as per the applicable provisions of the Income Tax Act. The company is required to pay the DDT within a specified time frame from the date of declaration, distribution, or payment of dividend, whichever is earlier.

2. Tax Implications for the Shareholders:

   From the perspective of the shareholders, the receipt of shares for full cash consideration under dividend is treated as a deemed dividend under Section 2(22)(e) of the Income Tax Act. This means that the value of the shares received is considered as a dividend income in the hands of the shareholders, and they are liable to pay income tax on such deemed dividend.

   The deemed dividend is taxable in the hands of the shareholders at the applicable rates of income tax, as per their individual tax brackets. However, the deemed dividend received by a specified category of shareholders, such as a domestic company or a firm, is exempt from tax under certain conditions and subject to fulfillment of prescribed criteria.

Compliances and Reporting Requirements

In the context of shares issued for full cash consideration under dividend, the company is required to comply with certain reporting and disclosure requirements as per the provisions of the Income Tax Act and the Companies Act, 2013.

1. Compliance with Dividend Distribution Tax (DDT):

   The company is obligated to calculate, withhold, and deposit the DDT within the statutory time limits. Additionally, the company must file the necessary statements and returns, providing details of the dividend distribution and payment of DDT, with the designated authority as per the prescribed formats and timelines.

2. Reporting of Deemed Dividend:

   For the shareholders, the receipt of shares for full cash consideration under dividend, resulting in deemed dividend income, must be duly reported in their income tax returns. The deemed dividend should be disclosed under the appropriate head of income, as per the provisions of the Income Tax Act, along with the relevant details and computations.

3. Compliance with Companies Act, 2013:

   From a corporate law perspective, the issuance of shares for full cash consideration under dividend also necessitates compliance with the provisions of the Companies Act, 2013. This includes adherence to the relevant provisions pertaining to the declaration and payment of dividend, maintenance of prescribed records, and disclosure in the financial statements of the company.

Impact of Double Taxation Avoidance Agreements (DTAA)

India has entered into Double Taxation Avoidance Agreements (DTAA) with various countries to mitigate the burden of double taxation on cross-border transactions. In the case of shares issued for full cash consideration under dividend to non-resident shareholders, the provisions of the DTAA can have a significant impact on the tax treatment of such transactions.

Under the DTAA, the taxability of deemed dividend income in the hands of non-resident shareholders and the rate of applicable tax are determined based on the provisions of the respective tax treaty between India and the country of residence of the non-resident shareholder. The DTAA provides for beneficial tax treatment, such as lower withholding tax rates or exemption from tax, in certain cases, subject to fulfillment of prescribed conditions and compliance with the procedural requirements.

Conclusion

The tax treatment of shares issued for full cash consideration under dividend is governed by the provisions of the Income Tax Act, 1961, and the Companies Act, 2013. It is essential for companies and shareholders to understand and comply with the applicable legal requirements, including the payment of dividend distribution tax by the company, reporting of deemed dividend income by the shareholders, and adherence to the provisions of the DTAA in the case of non-resident shareholders.

The tax implications of such transactions can have a significant impact on the financial position of the company and the individual tax liabilities of the shareholders. Therefore, it is advisable to seek professional advice and guidance to ensure compliance with the legal provisions and to optimize the tax efficiency of shares issued for full cash consideration under dividend.