The Budget has plugged a few loopholes that enabled unscrupulous corporate tax payers to avoid tax, be it avoidance of dividend distribution tax (DDT) via amalgamation, or distribution of loans to shareholders or other entities in which the shareholders were interested. This, in some circumstances, resulted in a tax arbitrage. At present, if a loan or advance is given by a company to a shareholder or to an entity in which such a shareholder has significant interest, it is taxed in the hands of the recipient as 'deemed dividend'. On the other hand, in the normal course, when dividend is distributed, the dividend-paying company pays a DDT (the rate according to Budget proposals is 20.56%). "If the recipient had a loss, the deemed dividend would be offset against such loss, mitigating the tax liability," explains Abhishek Goenka, partner and direct tax head at PwC India. In those cases, where the loan was given to an entity in which the shareholder had a significant stake, an issue arose on whether it should be the shareholder who should be taxed or the entity receiving the loan.

The Budget has plugged a few loopholes that enabled unscrupulous corporate tax payers to avoid tax, be it avoidance of dividend distribution tax (DDT) via amalgamation, or distribution of loans to shareholders or other entities in which the shareholders were interested. This, in some circumstances, resulted in a tax arbitrage. At present, if a loan or advance is given by a company to a shareholder or to an entity in which such a shareholder has significant interest, it is taxed in the hands of the recipient as 'deemed dividend'. On the other hand, in the normal course, when dividend is distributed, the dividend-paying company pays a DDT (the rate according to Budget proposals is 20.56%). "If the recipient had a loss, the deemed dividend would be offset against such loss, mitigating the tax liability," explains Abhishek Goenka, partner and direct tax head at PwC India. In those cases, where the loan was given to an entity in which the shareholder had a significant stake, an issue arose on whether it should be the shareholder who should be taxed or the entity receiving the loan.