Budget 2020: Govt abolishes DDT, to forego Rs 25,000 crore
DDT is a tax on dividends distributed by profit-making firms.Updated: Feb 02, 2020 01:16 IST
Giving in to a long-standing demand by domestic companies, finance minister Nirmala Sitharaman on Saturday abolished the Dividend Distribution Tax (DDT), which will now be imposed on investors instead.
“We propose to abolish DDT and go back to the old classical way of it being charged in the hands of the receiver,” said Sitharaman, adding that the total tax foregone because of the move was estimated at ₹25,000 crore.
DDT is a tax on dividends distributed by profit-making firms. Given the difficulty of collecting it from individuals, the government asks firms to deduct the tax and pay it on behalf of the investors. Currently, domestic companies pay DDT at 15%, but coupled with a surcharge and cess, the effective tax rate on the shareholder is 20.56%.
Multinational companies headquartered outside India pay a higher tax rate, lower surcharge and no DDT.
DDT was hugely unpopular because it did not allow foreign investors to claim credit in their home jurisdiction and led to increased compliance for companies. Domestic companies were also unhappy, seeing it as an unfair second layer of taxation.
“Since dividends have been axed for both stocks and mutual funds, this will be favourable for investors who are in the lower tax brackets while resulting in additional outgo for higher tax bracket investors,” said Mrin Agarwal, founder Finsafe India Pvt Ltd.
“Particularly in debt funds, abolition of dividends will vastly improve returns for investors in the lower tax brackets,” she added. An investor in the 10% tax bracket who earlier paid DDT at 29% on debt fund dividends will now only pay 10%. Capital gains, which are the other way of getting returns in debt funds, are taxed at slab rate for holding periods less than three years. This makes a lower DDT highly beneficial to low tax bracket investors.
The stock market failed to be enthused by the DDT abolition. The benchmark Sensex index of the Bombay Stock Exchange shed 987.96 points or 2.43%, to end at 39,735.53 points at the close of trading. This was largely owing to the levy continuing at marginal rates.
“Abolition of DDT could be detrimental to the stock markets. As the dividends will be taxed in the hands of the shareholders at regular tax rate and in case of high net worth individuals at the maximum marginal rates of 43%. This may lead to a higher tax burden for many investors. The expectation was that the shareholders should be taxed at a concessional rates,” said Girish Vanvari, founder of tax consultancy Transaction Square
This move was expected to augment the investible funds for corporate entities but it is the impact on individual investors that weighed on market sentiment.
Foreign shareholders stand to gain from the move, as treaties cap the dividend tax at 10% and 15% and can be even claimed as credit in their home jurisdictions, said Amit Maheshwari, partner at Ashok Maheshwary & Associates, a chartered accountants’ firm.