The market is expecting government to scrap dividend distribution tax (DDT) in today's budget speech and set a roadmap for phasing out long term capital gains (LTCG), short term capital gains (STCG) and securities transaction tax (STT).
Removal of the dividend distribution tax is high on equity investors' wishlist in the Budget. The market has been asking for removal of DDT ever since the government levied 10 per cent tax on investors receiving dividends of more than Rs 10 lakh a year in 2016. While there is buzz in the industry of a likely removal of DDT, but given continuous revenue concerns, the government might give this proposal a miss.
"A time-bound roadmap for the reduction of personal income tax, LTCG and DDT should be a high priority focus area of the budget. Formulation of a credible action plan for the creation of a vibrant market for long-term corporate bonds should also be announced in the budget. This will necessitate the building of supporting infrastructure and roll-out of key regulatory changes," said Anil Sarin, ED and CIO - Equities, Centrum Broking.
Experts believe that DDT not only leads to cascading taxation but also acts as an impediment for non-resident investors, who cannot claim credit for the same in their home jurisdictions.
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India currently levies a dividend distribution tax at an effective rate of 20.56 per cent on the 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 LTCG was introduced in Budget 2018 with a tax of 10 per cent on profits made above Rs 1 lakh on selling of equity shares and mutual funds. The tax, which was introduced by late finance minister Arun Jaitley, has not gone down well with industry stakeholders.
According to tax experts, some relief may also be provided on short-term capital gains (STCG) and securities transaction tax (STT). As per reports, the government has been working on measures which may include a review of existing slabs and holding period of STCG and STT.
Currently, the STCG are taxed at 15 per cent of total gains for equity holdings less than a year. Capital assets included in this category are listed equity shares, ETF (exchange traded fund) and equity-oriented mutual funds.
Market expects Sitharaman to scrap STT to raise volumes on the bourses. Dalal Street is of the opinion that STT which is levied at the time of purchase and sale of securities listed on stock exchanges in India leads to double taxation after the introduction of LTCG of 10% arising out of securities sold on recognised stock exchanges.