back
Industry News

How DDT abolition will impose 57% tax rate on Indian promoters
11-Feb-2020
Read More News

One of the most debated topics around the Union Budget 2020 has been the abolition of the dividend distribution tax (DDT). The government has proposed to remove the DDT and adopt the classical system wherein the dividend shall be taxed only in the hands of the recipients at their applicable rate and companies will no longer be required to pay DDT. The maximum deduction of expenses (interest, commission and other incidental expense) incurred for earning such dividend income has been capped at 20% under the proposed Section 57 of the Income Tax Act.

Fundamentally, dividend is received by the shareholders after the company pays the full tax and hence it amounts to double taxation. Comparably, partnership firms do not pay the same tax when the money is distributed to their partners. In that sense the companies have a major disadvantage.

While minority retail investors will clearly benefit from this change, it will also lead to several unintentional anomalies. Indian promoters and high net worth individuals (HNIs) will have to face a significant increase in the overall tax incidence to 57% (v/s 47% in FY20) on dividend income.

Photo: Mint
Photo: Mint

The change also brings in a disparity between Indian and MNC promoters with respect to the tax rates applicable on dividend income. While Indian promoters will be liable to pay tax at 43%, corporate foreign promoters will be charged a tax of 22%, or even lower (5% in some cases) if they are located in a country where the tax treaty provides beneficial rates.

Category III alternative investment funds (AIF) set up as a trust will be at a major disadvantage compared to Category I/II AIFs. This is because Category III AIFs do not have the pass-through status and will be taxed at a maximum marginal rate of 43%. Similarly, ULIP schemes may lose attractiveness compared to mutual funds as insurance companies are liable to pay tax on dividend income at 12%, while mutual funds enjoy specific exemption (u/s 10 (23d)) on such income.

Source : Live Mint back
×