25 February 2020
Budget 2020 has proposed to make dividend income from shares and mutual funds taxable in the hands of the recipient at the applicable income tax slab rates to the individual and abolish the Dividend Distribution Tax levied on dividend income from distribution by the company or mutual funds house.
India currently levies Dividend Distribution Tax at an effective tax rate of 20.5% on companies declaring dividends. This is over and above the corporate tax that companies pay on their profits. Following shall be the impact on Corporates and Individual Taxpayers cum Investors for various categories:-
- The Corporates may pay higher dividends on account of removal of DDT liability as they will have more surplus funds for disposal. However this will certainly entail higher tax burden for small and medium scale investors who did not earn dividend income in excess of INR 10 lacs.
- Corporates are required to pay certain percentage of profit as Tax on Profits earned by them. Further Dividend Distribution Tax is supposed to be paid on the dividend paid from Net Profit. Thus companies had to suffer double taxation. Abolishment of DDT in this budget shall remove cascading effect and domestic companies as well as MNCs will be highly benefited.
- Rate of DDT was 20.5% (including Surcharge and Cess) so removal of DDT is positive for Investors in the income tax bracket upto 20%. However, impact will be negative for the Investors who are above 20% tax bracket.
- Mutual Fund Investors who have opted for dividend plans will also be affected as they have to pay tax on the dividend received. So it will be beneficial is such type of Investors switch from Dividend plans to Growth Plan.
- For Promoters of Company, abolishment of DDT shall have bad impact on them as Promoters owning holding equity individually or in trusts may be adversely impacted, particularly when they are in the 43% tax bracket which may change the dividend culture of high dividend paying Indian corporates with high promoters stake.
- For Foreign Companies Investing in India, they shall be beneficiaries as they couldn’t claim credit in their home jurisdictions for DDT paid by their Indian Subsidiaries. It will also encourage foreign holding companies and Foreign Investors to invest in India.
Hence the removal of DDT shall benefit companies in the long run. Since the quantum of earnings in the form of retained earnings (Surplus) would be significantly higher, it can be used for capital expenditure and business expansion leading to a positive impact on India's GDP
The author can also be reached at tripathi.r.suyash @ gmail.com