GS-3, Indian Economy, Uncategorized

Removal of DDT will boost investments: CBDT

Background:

  • The budget proposed the removal of the Dividend Distribution Tax (DDT) payable by companies.
  • Currently, companies are required to pay a 15% tax plus applicable surcharge and cess on the dividends. Further, investors who receive more than ₹10 lakh as a dividend in a financial year have to pay a 10% tax on such income.
  • The Centre has removed 15% tax plus applicable surcharge and cess on dividends, currently paid by companies. The dividend will now be taxed only in the hands of the investors.

Significance:

The benefit to the non-residents:

  • Currently, non-residents are being taxed at a higher rate than the treaty rate with the possibility of no tax credit in the home country.
  • With dividend now being proposed to be taxed in the hands of the investors at their applicable slab rate, non-residents would get some relief with respect to the tax payable.
  • This would help increase the attractiveness of the Indian equity market.

Addressing inequity in dividend taxation:

  • While the DDT is applicable at a rate of 15%, the effective rate reaches to 20.56% due to surcharge and cess. Additionally, individuals were required to pay another 10% plus surcharge if the dividend income exceeded ₹10 lakh in a fiscal.
  • A single rate of taxation is always unfair and morally wrong as it favours taxpayers who are in higher tax brackets and works against those who are in lower tax brackets, thus leading to inequity in dividend taxation.
  • The government believes that the new regime would encourage individuals in the low-income bracket to invest in the capital market as the tax incidence would drop significantly. A person with an income up to ₹5 lakh will not have to pay tax on dividend income as against 20.56% paid by them indirectly.
  • The taxpayers in the low-income budget would benefit from the abolition of the DDT as the tax to be paid by them on their dividend income would be less than what they were earlier paying indirectly through it.

Increase investments:

  • The proposal will make more investors look at debt mutual fund products since, under the prevailing framework, the effective DDT on such products was between 38% and 50%.
  • The proposed move which will avoid double taxation applicable to dividends and bring down effective rates will help increase investments.

Thank you!

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