New Delhi: While presenting her second Union Budget, Finance Minister, Nirmala Sitharaman announced abolition Dividend Distribution Tax (DDT), thus fulfilling one of the biggest expectations of investors from Budget 2020.
Sitharaman in her speech says, “Currently, companies are required to pay tax on the dividend paid to its shareholders at 15 per cent in addition to applicable surcharge and cess along with the tax payable by the company on its profits.” She made it clear that now the dividends will be taxed in the hands of the recipient and she pegged the revenue foregone at Rs 25,000 crore.”
The objective behind abolishing DDT was to attract more foreign direct investments. In other words, this removal will make Indian equity markets much more attractive to foreign investors. Demand for removal of DDT gained impetus after the government slashed corporate tax rate in September last year. Even the direct tax code submitted to the government under the stewardship of Akhilesh Ranjan led task force also recommended the removal of DDT.
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By making this move, the Finance Minister has finally given into the long-time demand of domestic companies. This is because DDT leads to cascading of taxation and non-resident investors' inability to claim credit in their home country. Sitharaman acting on the same lines in her speech says: “Further, non-availability of credit of DDT to most of the foreign investors in their home country results in reduction of rate of return on equity capital for them. In order to increase the attractiveness of the Indian equity market and to provide relief to a large class of investors, I propose to remove the DDT and adopt the classical system of dividend taxation under, which companies would be exempted from paying DDT. The dividend shall be taxed only in the hands of the recipients at their applicable rate.”
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Dividend refers to the sum of money paid regularly to its shareholders out of its profits. Several companies listed on the stock market share profits (or dividends) with their investors.
Currently, domestic companies have to shell out whooping 15 per cent tax as DDT. It also includes surcharge and cess, which eventually rounds up to 20.35 per cent.
However, post February 1, 2020, domestic companies will not be required to do so and this move is expected to boost the investible funds for corporates.
