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Removal of DDT will boost investments: CBDT

A day after the Union Budget proposed removal of the dividend distribution tax (DDT) levied on companies, the government said on Sunday that the new regime was expected to encourage more people, especially in the low tax bracket, to invest in the capital market.

The government said that with dividend now being proposed to be taxed in the hands of the investors at their applicable slab rate, non-residents would get some relief even as it addressed 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 Central Board of Direct Taxes statement. “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 Rs. 10 lakh in a fiscal.

The government believes that the new regime, however, would encourage individuals in the low-income bracket to invest in the capital market as the tax incidence would drop significantly.

“...person with an income up to Rs. 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 Rs. 5 lakh to Rs. 7.5 lakh would pay tax at 10% and persons with Rs. 7.5 lakh to Rs. 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. The government believes that the proposal will make more investors look at debt mutual fund products since under the prevailing framework, the effective DDT on such products was between 38% and 50%.

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