Budget 2020: Union Finance Minister Nirmala Sitharaman during her Budget 2020 speech said Dividend Distribution Tax has been removed and will be applicable to individual investors only. 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, which is in addition to the tax payable by the company on its profits.
Sitharaman accepted levying of DDT had increased tax burden for investors, especially for those liable to pay tax less than the rate of DDT if the dividend is included in their income.
"Further, non-availability of credit of DDT to most foreign investors in their home country results in reduction of rate of return on equity capital for them," the FM said.
She said the decision has been taken 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.
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The government has allowed deduction for the dividend received by holding companies from their subsidiary to remove the cascading effect. "The removal of DDT will lead to estimated annual revenue forgone of Rs 25,000 crore," Sitharaman said, calling it as a "bold move" that would further make India an attractive destination for investment.
The clamour for removal of DDT had been on for a while. Stakeholders had said DDT not only led to cascading taxation but also acted as an "impediment" for non-resident investors who couldn't claim credit for the same in their home jurisdictions.
So far, India was levying total 20.56 per cent DDT on a company declaring dividends. This is over and above the corporate tax that companies pay on their taxable profit. Apart from this, resident non-corporate taxpayers (Individuals, Hindu Undivided Families or a firm) need to pay 10 per cent tax on dividends in excess of Rs 10 lakh a year. Hence, the effective tax rate becomes much higher. The decision is likely to benefit small as well as non-resident taxpayers.
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