A day after the Union Budget proposed removal of the dividend distribution tax (DDT) levied on companies, the government has said the new regime is expected to encourage more people, especially in the low tax bracket, to invest in the capital market.
The government has further said with dividend now being proposed to be taxed in the hands of the investors at the applicable slab rate, non-residents will get some relief even as it addresses the “issue of inequity in dividend taxation”.
“Single rate of taxation is always iniquitous as it favours taxpayers who are in higher tax brackets and works against those who are in lower tax brackets,” says a statement from the Central Board of Direct Taxes.
“Thus, it was a case of reverse subsidy from the poor to rich taxpayers. Further, non-residents were taxed at a higher rate than the treaty rate with the possibility of no tax credit in the home country,” it said.
According to the government department, while the DDT was pegged at 15%, the effective rate touched 20.56% due to surcharge and cess. Additionally, individuals were required to pay another 10% plus surcharge if the dividend income exceeded ₹10 lakh in a fiscal.
The government believes that the new regime, however, would encourage individuals in low income bracket to invest in the capital market as the tax incidence would drop significantly.
“...person with an income up to ₹5 lakh will not have to pay tax on dividend income as against 20.56% paid by them indirectly. Similarly, under the new tax regime, persons with an income from ₹5 lakh to ₹7.5 lakh would pay tax at 10% and persons with ₹7.5 lakh to ₹10 lakh would pay tax at 15%,” it explained.
All these taxpayers would benefit from the abolition of the DDT as the tax to be paid by them on their dividend income would be less than what they were earlier paying indirectly through it, it added.
Interestingly, the government further believes that the proposal would make more investors look at debt mutual fund products as well since under the prevailing framework, the effective DDT on such products was between 38% and 50%.
“The rate similar to DDT for distribution of income by debt fund was 25% for individual and HUF and 30% for others. After grossing up and including surcharge/cess this comes to 38.33% and 49.92% respectively. Thus, the new system would encourage debt mutual fund market in India as most of individuals would pay tax at lower rate on income received from debt fund in comparison to what they were paying under the old regime.”
