Budget 2020: Dividend distribution tax scrapped, but shifts the burden to the recipients; high income earners to bear the brunt

Those paying 20%+ taxes will end up paying more taxes as earlier they used to pay no tax on dividend income of up to Rs 10 lakh, and companies used to pay 15% DDT only

Kumar Shankar Roy Feb 1, 2020

Dividend taxationIt’s like robbing peter to pay paul. The Union Government has done away with 15% Dividend Distribution Tax (DDT) on the dividend paid to shareholders and shifted the burden of paying tax to dividend receivers instead of dividend payers. This means those in the high-income bracket will end up paying more if they receive dividend income.

Currently, companies are required to pay DDT on the dividend paid to its shareholders at the rate of 15% plus applicable surcharge and cess in addition to the tax payable by the company on its profits. It has been argued that the system of levying DDT results in increase in tax burden for investors and especially those who are liable to pay tax less than the rate of DDT if the dividend income is included in their income. Also, 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 the companies would not be required to pay DDT. The dividend shall be taxed only in the hands of the recipients at their applicable rate,” Union Finance Minister Nirmala Sitharaman said in her 2020-21 Budget speech.

So the dividend receiver will pay tax on dividends as per his or her applicable rate. Earlier companies paid 15% plus surcharges on it. If you are in the 30% tax bracket, then you will pay 30% on the dividend income you receive.

Experts agree that shifting the burden of paying tax on dividend receipts increases the burden on high-earners. “DDT is removed but individual taxpayers will need to pay tax on the same. Those falling in 30% tax bracket will end up paying more taxes compared to earlier as they used to pay no tax on dividend income of up to Rs 10 lakh,” pointed out Kuldip Kumar, Leader Personal Tax, PwC India.

“DDT removal is good as it increases dividends received in the hands of the taxpayer – however, such receipts now are taxable in their hands. Those above 20% tax slab – will now face more tax on their dividend income,” says Archit Gupta, Founder, and CEO, ClearTax.

The DDT proposal means that there will be no DDT for dividends by mutual funds, which are pass through vehicles. This means dividend from MFs will now be taxable in the investor’s hands.

The Finance Minister has also proposed to allow deduction for the dividend received by holding company from its subsidiary. The removal of DDT will lead to estimated annual revenue forgone of Rs 25,000 crore for the government.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].