Shares Issued for Full Cash Consideration Under Dividend

In India, the issuance of shares for full cash consideration under dividend taxation is governed by the Income Tax Act, 1961. This article will discuss the legal provisions and implications associated with this practice, as well as the tax treatment of such shares for both the issuing company and the shareholders.

Under the Income Tax Act, 1961, the issuance of shares for full cash consideration under dividend is covered under Section 2(22)(a), which deals with the definition of "dividend". According to this section, any distribution of accumulated profits by a company to its shareholders, whether in cash or in kind, is deemed to be a dividend. This includes the distribution of shares by a company to its shareholders as a form of dividend.

Tax Treatment for the Issuing Company

When a company issues shares to its shareholders as a form of dividend, it is required to pay dividend distribution tax (DDT) under Section 115-O of the Income Tax Act. DDT is currently levied at the rate of 15% (plus surcharge and cess) on the amount of dividend distributed. However, if the company is not liable to pay DDT due to its status as an Infrastructure Investment Trust or Real Estate Investment Trust, the shareholders are liable to pay tax on the dividend received.

The issuance of shares for full cash consideration is seen as a mode of distributing profits to shareholders without actually transferring any cash out of the company. As a result, the company is still liable to pay DDT on the value of the shares distributed as dividend. The DDT is payable by the company within 14 days from the date of declaration, distribution, or payment of the dividend, whichever is earliest.

Tax Treatment for the Shareholders

From the perspective of the shareholders who receive shares as a form of dividend, the value of the shares received is taxable as "income from other sources" under Section 56(2) of the Income Tax Act. The fair market value of the shares as on the date of distribution is deemed to be the income of the shareholder. This amount is added to the total income of the shareholder and taxed at the applicable income tax slab rates.

The taxability of shares received as dividend is not dependent on whether the shareholder chooses to retain or sell the shares. Even if the shareholder decides to sell the shares immediately after receiving them, the value of the shares as on the date of distribution is still taxable as income. This tax treatment is designed to ensure that the distribution of shares as dividend does not result in tax avoidance by the shareholders.

Corporate restructuring and Share Buyback

It is important to note that the issuance of shares for full cash consideration under dividend may have implications in the context of corporate restructuring and share buyback. Under the Income Tax Act, the buyback of shares by a company is also subject to tax implications, including the levy of buyback tax under Section 115QA.

In the context of corporate restructuring, such as a merger or demerger, the treatment of shares received as dividend may vary based on the specific provisions applicable to the restructuring. Companies involved in corporate restructuring should carefully evaluate the implications of issuing shares as dividend in the context of their overall tax planning and compliance.

Compliance and Reporting Requirements

Companies that issue shares for full cash consideration under dividend are required to comply with various reporting and disclosure requirements under the Income Tax Act. This includes the filing of relevant tax returns, along with the payment of DDT within the stipulated timeline. Additionally, the shareholders who receive shares as dividend are also required to include the value of the shares in their tax returns and pay tax on the same.

It is imperative for both companies and shareholders to maintain accurate records and documentation related to the issuance and receipt of shares as dividend. This includes maintaining records of the fair market value of the shares as on the date of distribution, along with any relevant communication and documentation with the tax authorities.

Conclusion

The issuance of shares for full cash consideration under dividend is a mechanism used by companies to distribute profits to their shareholders. However, the tax implications associated with this practice are significant, both for the issuing company and the shareholders. It is imperative for companies to carefully assess and comply with the tax provisions related to the distribution of shares as dividend, while shareholders must ensure the accurate reporting and payment of tax on the value of the shares received.

In conclusion, it is important for companies and shareholders to seek professional tax advice to navigate the complex tax implications of issuing shares as dividend, ensuring compliance with the legal provisions and avoiding any potential tax disputes or penalties. By understanding and adhering to the tax treatment of shares issued for full cash consideration under dividend, companies and shareholders can effectively manage their tax liabilities and maintain a transparent and compliant approach to dividend distribution.