[ By Bobby Anthony ]Union Finance Minister Nirmala Sitharaman has proposed to abolish the deeply unpopular dividend distribution tax (DDT) in her union budget speech.Currently, no other country in the world has a DDT regime. Even in India, it was only in 1997 that DDT was made a part of income tax laws. The tax was scrapped in 2002, but was brought back in the very next year on the pretext...
Union Finance Minister Nirmala Sitharaman has proposed to abolish the deeply unpopular dividend distribution tax (DDT) in her union budget speech.
Currently, no other country in the world has a DDT regime. Even in India, it was only in 1997 that DDT was made a part of income tax laws. The tax was scrapped in 2002, but was brought back in the very next year on the pretext of ease of tax administration.
The finance minister has stated that equity dividends will now be taxed in the hands of recipients of dividends.
The government currently taxes at the rate of 20.35% (including cess and surcharge) on dividends distributed by companies to their shareholders. This results in less money in the hands of investors. The abolition of this tax could boost market sentiment and make Indian equities more attractive.
Presently, domestic companies are subject to DDT at 15% of the aggregate dividend declared, distributed or paid.
However, since it also includes a 12% surcharge and a 3% education cess, the effective DDT rate comes to 20.35%.
DDT applies to mutual funds as well. Because fund houses deduct DDT at source, dividends from MF schemes are tax-free for shareholders.
The DDT for debt funds is 25% for individuals and 30% for corporates. For equity mutual funds, the rate is 10% (along with surcharge and cess, it comes to 11.648%).
Dividend distribution tax is largely perceived as a surrogate tax and it is seen to be obstructing the flow of foreign direct investment (FDI). Therefore, doing away with this tax is expected to give a major push to investment.
The tax on dividends is a triple levy. Dividend basically means the distribution of a company's after-tax profits. The tax paid by a company is the first level. DDT is the second level. The recently introduced Super Rich Dividend Tax, which is a 10% tax on anybody who earns a dividend income of Rs 10 lakh or above, is the third level of taxation.
It may be recalled that there had been a demand to abolish DDT ever since the corporate tax cut in September 2019. A task force on the direct tax code had also recommended scrapping DDT in order to boost investments.
Incidentally, it was Nirmala Sitharaman who had introduced this provision in last year's union budget in order to clamp down upon the strategy of avoiding DDT by buying back of shares by listed entities.