Earlier effective Dividend Distribution Tax (DDT)was 16.995 per cent on the dividend declared. The tax was then grossed up in Budget 2014 and the current effective DDT rate was 20.56 per cent on the dividend declared. Further resident (non-corporate) shareholders were liable for an additional tax at 10 per cent (plus applicable surcharge and cess) on dividend exceeding Rs 10 lakh. The effective tax rate for Individuals falling in highest tax slabs was 14.248 per cent.
In the Budget 2020, DDT in the hands of the company has been abolished and has been simultaneously substituted with a tax in the hands of the shareholders at applicable tax rate. Additional tax of 10 per cent also has been done away with. The companies declaring such dividend will have to now deduct tax at source (TDS) at 10 per cent on the amount distributed as dividend.
Small tax payers would definitely benefit as their effective rate of tax is much lower and would result in substantial saving. Impact on taxation of large retail investors may be negative, as dividend is expected to be taxable at the maximum slab rate in their hands. The effective tax rate for individuals falling in highest tax slabs is 42.74 per cent i.e. there will be an additional burden of 28.492 per cent.
However, this will promote foreign investment since the foreign investors would now claim benefit under the double tax treaty where the tax rates ranges from 5 to 15 per cent and the same will be available as credit in their home countries. This will result in direct saving of 20.56 per cent for these entities.