Staring at revenue shortfall, I-T dept sends tax notices to mutual funds

Move comes after CBDT raised concerns over direct tax collection growth and directed I-T department to adopt measures to shore up revenue

The income-tax (I-T) department is nudging companies, especially mutual fund houses, to pay the dividend distribution tax (DDT).
 
This comes as the I-T department is staring at a shortfall in revenue collection.
 
According to sources, the tax department has issued notices to at least a dozen asset management companies (AMCs) that have reportedly announced dividends, but are yet to pay the tax.
 
“Notices are being sent to many domestic companies (both private and public sector firms), along with fund houses that are yet to deposit the DDT to the exchequer,” said a tax official in the know.
 
He said collections under the dividend tax were showing double-digit growth. However, the mop-up from fund houses has declined, compared to the previous financial year, he added.

 
The move comes after the Central Board of Direct Taxes (CBDT) raised concerns over the direct tax collection growth and directed the I-T department to adopt measures to shore up revenue. The CBDT has mentioned that the department should examine those companies that are yet to pay the DDT.  According to the official data, the I-T department has collected Rs 43,160 crore of dividend tax up to December. Of this, fund houses have paid Rs 4,000 crore.
 
At present, if a domestic company gives dividend to its shareholders, it has to pay a dividend tax of 20.36 per cent (15 per cent plus surcharge and cess). Tax, including surcharge and cess, on debt-oriented funds and equity-oriented funds is 29.12 per cent and 11.6 per cent, respectively.
 
Sources say the tax department has anticipated more dividend tax from fund houses in this financial year, after the government imposed 11.64 per cent DDT on equity-oriented funds from April 1, 2018.  Before this, the DDT was applicable to only debt-oriented funds and equity funds were tax-free. Typically, companies and even AMCs declared dividend in the February and March due to the closing of the financial year, but this time there are a few fund houses that are unlikely to declare dividend, said a mutual fund expert. Equity-oriented funds had declared high-dividend payouts before the new norms came into effect, he added.  According to him, the new rule has made the dividend payout less attractive. Fund houses are not suggesting investors to enrol in such schemes and that could be a possible reason for not getting the desired collection, he added.  The DDT has to be paid within 14 days of declaration, distribution or payment of dividend, whichever is the earliest. In the case of non-payment within 14 days, the company will be liable to pay by way of interest at the rate of 1 per cent of the DDT.  In the current financial year, about 1,381 listed firms have announced or proposed equity dividend of Rs 1.6 trillion.
 

In FY17, the dividend announced was slightly higher at Rs 1.63 trillion. Between FY14 and FY16, 1,400-odd listed firms declared the dividend between Rs 1.40 trillion and Rs 1.58 trillion. The expert said investors used to invest in dividend plans as it was tax-free. But, now, taxation has left them with reduced returns in hand. Though the dividend remains tax-free in the hands of the investor, the fund house deducts the DDT before any dividend payment.
 
Other than this, taxmen are also focusing on the securities transaction tax (STT) as it showing an uptick so far. Up to December, Mumbai collected Rs 8,913 crore of STT against a target of Rs 11,000 crore for this financial year.
 
The CBDT has asked I-T officials to focus on collections from dividend payout and the STT. The department believes it could help them meet the Budget Estimate of Rs 11.5 trillion.