Shifting the onus of compliance arising out of dividend distribution from corporates to individuals, Finance Minister Nirmala Sitharaman on Saturday said that recipient investors would now be liable to pay the tax at the existing rates. The move will abolish dividend distribution tax (DDT) on companies who pay these dividends, and is aimed at increasing the return on capital equity for foreign investors. Further, the government also proposed to allow companies deductions for the dividend received from their holding company, Sitharaman said.
The current system of levying DDT leads to an increased tax burden for individuals, the Finance Minister said, adding that it cascaded for investors who were liable to pay tax at rates less than that of DDT, if the dividend is included in their income.
As the dividend received is an income to the shareholder and not the company, the incidence of the tax should also lie on the recipient of the monies, according to Budget documents. “Moreover, the present provisions levy tax at a flat rate on the distributed profits, across the board irrespective of the marginal rate at which the recipient is otherwise taxed. The provisions are hence, considered, iniquitous and regressive,” the Budget document read.
At present, the current rate for DDT stands at 15 per cent, which after including the surcharge and cess, comes to around 20.5 per cent. The annual revenue forgone after the abolishing of DDT has been pegged at Rs 25,000 crore.
Tax compliance may not see improvement
During her Budget speech, Finance Minister Nirmala Sitharaman said that the system of levying dividend distribution tax (DDT) results in increased tax burden for investors, especially those who are liable to pay tax less than the rate of DDT, if the dividend is included in their income. The move is also aimed at benefitting foreign investors. However, there is the possibility that taxing the dividend in the hands of the shareholder would defeat the objective of improved compliance.
The move is likely to lead to an increase in the taxable income of individual investors. At present, investors are not required to pay any tax on dividend incomes below Rs 10 lakh, after which it is taxed at flat rate of 10 per cent.
“While the endeavour is to reduce litigation and improve compliance, taxing dividend in the hands of shareholders would defeat the objective of improved compliance. Further, the shareholders may fall in a different tax bracket and hence there could be different tax implications on the dividend income”, said Abhishek A Rastogi, partner at Khaitan & Co.
It may also impact private sector investment which has been sluggish over the past couple of years, experts said.
“DDT has been abolished and therefore obviously foreign investors will benefit. But then it becomes fully taxable in the hands of shareholders which is not the right way of doing it. It will impact the private sector investment,” Nirmal Jain, founder and chairman of IIFL, said.
DDT was introduced in the year 1997 as a move to boost investment in shares of domestic companies. Though initially capped at 10 per cent of the total dividend being distributed, it has grown to nearly 20.5 per cent over the years. The tax was abolished in 2002, only to be reintroduced the next year.
The government had, while reintroducing the tax in 2003, argued that it was easier for them to collect tax at a single point from the company instead of individual investors.
The idea, the Budget papers for this fiscal noted, had “outlived itself” as newer technology and tracking system made it easier to track the incomes in the hands of investors themselves.
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In 2003, while reintroducing the DDT, the government had proposed the tax slab rate at 12.5 per cent. Apart from domestic companies, mutual funds — including UTI Mutual Fund — was also included under the tax bracket. Equity oriented mutual fund schemes had then been exempted from the purview of DDT for one year. The government had also then increased the general deduction given to investors, from Rs 9,000 to Rs 12,000.
“Thus, the total deduction available under Section 80L will be Rs 15,000. Though dividend will not be taxable in the hands of the recipient from next year, I propose to retain this deduction at Rs15,000 for next year also,” the then finance minister Jaswant Singh had said.
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