The government on Sunday said that abolition of Dividend Distribution Tax (DDT) would benefit all the taxpayers in the country. Government said, "Tax to be paid by them (taxpayer) on their dividend income would be less than what they were earlier paying indirectly through DDT".
The centre added that abolition of DDT would encourage low-income earners, who have total income up to Rs 5 lakh, to invest in capital market. Also, the decision will provide relief to a large class of investors.
"It would encourage low-income earners to invest in the capital market as the person with total income up to Rs 5 lakh will not have to pay tax on dividend income as against 20.56 per cent paid by them indirectly," the government said.
Currently, India levy 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.
Government added that the new system would boost debt mutual fund market as most individuals would have to pay tax at lower rate on income received by debt fund.
"Rate similar to DDT for distribution of income by debt fund was 25 per cent for individual and HUF and 30 per cent for others. After grossing up and including surcharge/cess this comes to 38.33 per cent and 49.92 per cent respectively," it said. Hence, the proposal has not only addressed the issue of inequity in dividend taxation but has also given relief to non-residents, it added.
Finance Minister Nirmala Sitharaman, in her Budget speech, announced the abolition of DDT--a move that will result in revenue foregone to the tune of Rs 25,000 crore.
The centre stated that single rate of taxation was always unfair as it favoured taxpayers who were in higher tax brackets and work against those who were in lower tax brackets.
"India has always followed a classical system of taxation. However, for ease of collecting taxes and to reduce the compliance burden on companies in issuing so many tax deduction certificates, it was decided to follow DDT system of taxation so that the tax is collected at one place," it said.
According to the government, most countries in the world follow this classical system of taxation. There are only a few countries like Australia which allows a credit of tax paid by the company while taxing dividend in the hands of shareholders.
(With ANI inputs)