Budget 2020

Budget 2020 | No more double taxation on dividends

Centre removes 15% tax plus applicable surcharge and cess on dividends, currently paid by companies

The government fulfilled a long-standing demand of the capital markets when it proposed scrapping the dividend distribution tax (DDT) that is levied on companies. Dividend will now be taxed only in the hands of the investors.

This would come as a relief for companies and capital market participants who have been lobbying hard for the removal of DDT at the company level, which, they felt led to double taxation as such payouts are also taxed at the investor level.

Currently, companies are required to pay 15% tax plus applicable surcharge and cess on the dividends. Further, investors that receive more than ₹10 lakh as dividend in a financial year have to pay 10% tax on such income.

“It has been argued that the system of levying DDT results in increase in tax burden for investors and especially those who are liable to pay tax less than the rate of DDT if the dividend income is included in their income,” said Ms Sitharaman, while presenting her budget.

“In order to increase the attractiveness of the Indian equity market and to provide relief to a large class of investors, I propose to remove the DDT and adopt the classical system of dividend taxation under which the companies would not be required to pay DDT. The dividend shall be taxed only in the hands of the recipients at their applicable rate,” she added while highlighting the fact that the removal of DDT would lead to estimated annual revenue forgone of Rs.25,000 crore.

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According to experts, the effective DDT for companies was nearly 17%, which went up to more than 20% in 2014 while that for individuals it was a little less than 15%.

More importantly, the government has also done away with the additional 10% tax on investors and the dividend will now be only taxed at the applicable tax rate based on the income slab of the individual. “Small tax payers would definitely benefit as their effective rate of tax is much lower and would result in substantial saving,” said Ashok Shah, Partner, N A Shah Associates.

“Impact on taxation of large retail investors may be negative, as dividend is expected to be taxable at the maximum slab rate in their hands. The effective tax rate for individuals falling in highest tax slabs is 42.74% i.e. there will be an additional burden of 28.492%,” explained Mr. Shah.

Meanwhile, the government has also proposed allowing deduction for the dividend received by holding company from its subsidiary.

According to Mr Shah, foreign investors can now claim benefit under the double tax treaty where the tax rates ranges from 5% to 15%, which will result in direct saving of 20.56% for such overseas entities.

“... non-availability of credit of DDT to most of the foreign investors in their home country results in reduction of rate of return on equity capital for them... This is another bold move which will further make India an attractive destination for investment,” said the finance minister. The issue of “double taxation” was part of the pre-budget memorandum that Association of National Exchanges Members of India had presented to the government. In its memorandum, the umbrella body of brokers had said that the current form of DDT was “adversarial” in nature leading to double or triple taxation of corporate earnings.

Incidentally, the broker lobby had also sought restoring long term capital gains (LTCG) tax benefits on equities, which was withdrawn as part of the Finance Bill 2018. The government, however, chose not to touch upon the LTCG issue in the budget.

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Printable version | Feb 19, 2020 3:52:46 AM | https://www.thehindu.com/business/budget/budget-2020-no-more-double-taxation-on-dividends/article30715599.ece

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