NEW DELHI: Dividend tax
The government has decided to remove the much-reviled Dividend Distribution Tax (DDT) as part of this year’s budget proposals. Shareholders will now pay normal income-tax on dividend receipts. Currently, the DDT, which is a tax on dividend deducted at source by corporates and paid directly to the government, stands at 20.56 per cent. The direct tax code panel had recommended the move in its report last year.
Officials said the logic behind the move was that DDT was seen as double taxation, where taxes have to be paid at two places: as DDT and then again as income-tax in the hands of earners. At the same time, the existence of the DDT actually means that the burden of tax on holding companies is far higher than the new corporate tax rate of 22 per cent. According to some calculations, it was actually 37 per cent, taking into account surcharges and DDT. Finance Minister Nirmala Sitharaman termed it as “another bold move, which will further make India an attractive destination for investment,” adding that it would result in a revenue sacrifice of Rs 25,000 crore per annum.
“The move to eliminate the dividend distribution tax and shift to the classical system is a positive move that will simplify the corporate tax regime. Importantly, it will make it easier for foreign investors to claim treaty benefits and foreign tax credits in their home country and enable small shareholders to pay tax on dividends at the usual marginal rates,” said Hitesh D Gajaria, partner and co-head (tax), KPMG India.