Dividend Distribution Tax Gone!!
Removal Of DDT In Budget 2020
A scheme for payment of Dividend Distribution Tax (DDT) has been introduced in Finance Act 2003 where domestic companies were needed to pay tax on the profits being shared and such dividend or profit was exempt in the hands of the taxpayer.
The union budget 2020 has proposed to wipe out the DDT system for dividends paid on or after 1 April 2020. Therefore, dividends will be subject to tax in the hands of the investors or shareholders at relevant tax rates.
Budget 2020 has planned to make profit from taxable shares and mutual funds in the hands of the beneficiary at the relevant income tax slab rates to the particular and abolish the DDT until now required on dividend income before distribution by the company or mutual fund house.
Right now, DDT is paid before paying dividend to their investors or shareholders by the companies. Further, taxpayers earning dividend income of above Rs.10 lakh are mandatory to pay tax at the rate of 10%.
DDT moved to individuals instead of companies
Various measures include:
- Concessional tax rate of 15% has been spreading to control generation companies.
- Concessional rate of 100% has been planned to sovereign wealth funds on investment in infra projects.
- Concessional rate of 5% on interest payment to non-residents has been extended up to 30th June, 2022.
- Another proposal is deferment of tax payment by employees on employee stock ownership plan (ESOPs) from new companies by five years.
Benefits of removal of Dividend Distribution Tax (DDT)
- Revoking of the DDT system should favour foreign investors/companies having auxiliary in India, as they should now be qualified to claim credit for the tax paid on dividends in India.
- Abolition of DDT will increase attractiveness for investment.
- The government as of now taxes at the rate of 20.35% (including cess and surcharge) on dividends distributed by companies to their shareholders. This ends up as in less money in the hands of investors.
- It would encourage low-income earners to invest in the capital market as the individual with total income up to Rs 5 lakh won't need to pay tax on dividend income as against 20.56% paid by them indirectly.
India has consistently followed a traditional system of taxation. However, for simplicity of gathering taxes and to reduce the compliance burden on companies in giving so many tax deduction certificates, it was chosen to follow DDT system of taxation so that the tax is gathered at one spot.
In accordance with government, most nations in the world follow this traditional system of taxation. There are just a couple of nations like Australia which permits a credit of tax paid by the company while taxing dividend in the hands of shareholders.
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