Budget bonanza: Govt likely to do away with dividend distribution tax

Budget 2018

The finance ministry is likely to do away with the dividend distribution tax (DDT) in the upcoming Union Budget. Sources in the know have said there have been considerable discussions on the topic among various stakeholders.

At present, if a company gives dividend to its shareholders, it has to pay DDT of 20.36 per cent (15 per cent plus surcharge and cess).

Two stakeholders, who met Finance Minister Arun Jaitley and Finance Secretary Hasmukh Adhia separately for pre-Budget consultations, told Business Standard that the issue of DDT came up in the meetings that took place between industry representatives and Adhia.

This move, experts say, would help the government in more ways than one — it would boost India Inc’s ease of doing business, encourage firms to give more dividends, and improve returns for retail investors in the lower income tax bracket.

"It is expected that Budget 2018 may propose a withdrawal of DDT and return to the classic system of dividend taxation, that is, dividend income to be taxed at the hands of the recipient shareholders," said Sonu Iyer, partner and leader, India region people advisory services, EY.

According to Iyer, the case of removal of DDT is the need to make effective corporate tax rate in India compare favourably with competing economies. It also enables foreign investors to get credit of tax in their countries, thereby improving return of investment and ease of doing business in India. "It also substantially reduces litigation under Section 14A, which disallows expenditure in relation to exempt income," Iyer said.

DDT was introduced in the Finance Act 1997.

Though the dividend income is tax-free in the hands of investors, since there is a tax incidence before dividend payout, it reduces the returns for taxpayers in the lower tax brackets of 10 per cent and 20 per cent, respectively.

Also, individuals, Hindu Undivided Families, and partnership firms earning more than Rs 1 million in dividend income have to pay an additional tax of 10 per cent plus surcharge and cess. With this move, the government can achieve the objective of lowering taxation for corporate houses and also improving returns for people in the lower income tax bracket slab, as the dividend would be added to their income and taxed, according to the tax slab.

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