New Delhi: The government on Sunday said that all taxpayers would benefit from the abolition of Dividend Distribution Tax (DDT) as the "tax to be paid by them on their dividend income would be less than what they were earlier paying indirectly through DDT."
"It would also encourage low-income earners to invest in the capital market as the person with total income up to Rs 5 lakh will not have to pay tax on dividend income as against 20.56 per cent paid by them indirectly. Similarly, under the new tax regime, persons with total income from Rs 5 lakh to Rs 7.5 lakh would pay tax at 10 per cent and persons with total income from Rs 7.5 lakh to Rs 10 lakh would pay tax at 15 per cent, the government said.
The Centre has also asserted that the new system would encourage debt mutual fund market in India "as most of the individuals would pay tax at a lower rate on income received from debt fund in comparison to what they were paying under the old regime."
Explaining the new system, the government said, the rate of DDT is 15 per cent which, after grossing up, comes to 17.65 per cent. Taking the impact of the surcharge at 12 per cent and cess at 4 per cent, this comes to 20.56 per cent. In addition, a resident (other than the company) was required to pay tax at 10 per cent plus applicable surcharge and cess if the dividend income in a year exceeds Rs 10 lakh.
"Rate similar to DDT for distribution of income by debt fund was 25 per cent for individual and HUF and 30 per cent for others. After grossing up and including surcharge/cess this comes to 38.33 per cent and 49.92 per cent respectively," it said.
"Thus, the government said, it was a case of reverse subsidy from the poor to rich taxpayers. Further, non-residents were taxed at a higher rate than the treaty rate with the possibility of no tax credit in the home country. Hence, the proposal in the Finance Bill 2020 has not only addressed the issue of inequity in dividend taxation but has also given relief to non-residents.
The government said the single rate of taxation is always iniquitous as it favours taxpayers who are in higher tax brackets and work against those who are in lower tax brackets.
"India has always followed a classical system of taxation. However, for ease of collecting taxes and to reduce the compliance burden on companies in issuing so many tax deduction certificates, it was decided to follow DDT system of taxation so that the tax is collected at one place," it said.
Under the corporate system of taxation, a corporate entity is always a separate legal entity and is taxed in respect of its income. In addition, shareholders are taxed on dividend income received by them [called Dividend Distribution Tax (DDT)].
According to the government, most countries in the world follow this classical system of taxation. There are only a few countries like Australia which allows a credit of tax paid by the company while taxing dividend in the hands of shareholders. All other countries tax dividend in the hands of shareholders either at applicable rate (Canada, Japan, Mexico, New Zealand, United Kingdom) or at a flat rate ranging from 10 per cent to 30 per cent (Argentina, China, Denmark, France, Germany, Italy, Ireland, Indonesia, Philippines, Russia, South Africa)."
Finance Minister Nirmala Sitharaman on Saturday announced the abolition of DDT, a move that will result in revenue foregone to the tune of Rs 25,000 crore.
"The dividend will be taxed only in the hands of the recipients at their applicable rates," she said while presenting the Union Budget for 2020-21 on Saturday.
Currently, companies are required to pay DDT on the dividend paid to its shareholders at the rate of 15 per cent plus applicable surcharge and cess in addition to the tax payable by the company on its profits.
Sitharaman said the system of levying DDT results in an increase in tax burden for investors, and especially for those who are liable to pay tax less than the rate of DDT if the dividend income is included in their income.
Further, non-availability of credit of DDT to most of the foreign investors in their home country results in a reduction of the rate of return on equity capital for them.