Mumbai: Much awaited announcement on Dividend Distribution Tax (DDT) received mixed response as the equity market fell sharply in contrast to finance minister Nirmala Sitharaman’s wish to make equity market more attractive. It would impact the high networth investors (HNIs) who would have to pay DDT now while it will be good for the corporates, especially the multinationals who would be taking home more profits now.
“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,” the finance minister said.
“Further, 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,” the FM said.
Currently, companies are required to pay DDT on the dividend paid to its shareholders at the rate of 15 per cent plus applicable surcharge and cess in addition to the tax payable by the company on its profits.
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.
Further, in order to remove the cascading effect, the FM proposed to allow a deduction for the dividend received by holding company from its subsidiary. The removal of DDT will lead to estimated annual revenue forgone of Rs 25,000 crore.
DDT is not helping much, only helping people in the lower tax bracket will benefit as DDT will be taxed as per the appplicable tax slab, said experts. For the people in 20-30 per cent slab, dividend received will be taxed at the slab rate.
“When DDT becomes fully taxable in the hands of shareholders which is not correct because shareholders are also owners and they pay tax on profits and it gets taxed again,” said Nirmal Jain, founder and chairman of IIFL.