Divend Distribution Tax is a big headache for companies, especially the ones that come out with huge dividend payouts every year. Some are of the opinion that this should be scraped out as it falls within the gambit of double taxation. Since, the companies have already paid tax on the income and that income is just being distributed among its owners, and there is no actual taxable transaction taking place. However, there are a few options available to the companies to save on DDT.
Bonus shares issue: This is one of the most popular method of utilising the free reserves of the company if the company is short on cash reserves. This gives addittional shares to shareholders which can then be sold and encashed in the secondary market if the shareholders wish to.
Bonus Debenture issue: This is one of the lesser known ways of distributing profits. The company can issue bonus debentures to the existing shareholders, saving on the DDT. Another added advantage of this is that the interest payable on such Debentures is Tax deductible.
Though there are some effective methods of saving on the DDT, there is always a darker side to it, as the Assessing officer can always challenge it and tax it as dividend.
Ofcourse, there is always an alternate option available for companies to convert into LLP's which will not only help them get away from DDT but also other tax benefits such as MAT benefits etc.