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No change in dividend distribution tax, says finance secretary Subhash Garg

No change in dividend distribution tax, says finance secretary Subhash Garg

No change in dividend distribution tax, says finance secretary Subhash Garg
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By IANS  Jul 12, 2019 7:30:44 PM IST (Published)

Finance secretary Subhash Chandra Garg on Friday ruled out any change in the dividend distribution tax, but expressed flexibility that grandfathering tax on buybacks can be discussed with the revenue department.

Finance secretary Subhash Chandra Garg on Friday ruled out any change in the dividend distribution tax, but expressed flexibility that grandfathering tax on buybacks can be discussed with the revenue department.

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The key changes in 2019 Union Budget's taxation-related measures affecting the deal market include the extension of buyback tax-related provision to listed entities. This provision was earlier introduced as an anti-abuse measure to check the practice by unlisted companies to distribute accumulated profits through the buyback route rather than the dividend declaration route, thereby evading dividend distribution tax (DDT).
"There is no change in dividend distribution tax, there is no plan to change it. I am not in a position to say on grandfathering buyback tax, but can discuss it with the revenue department," said finance secretary Garg at a CII event on Budget discussion.
In the Budget, the government taxed the buyback route to check dividend distribution tax evaders. But Garg offered ways to get out of the tax on buybacks.
"Dividend distribution Tax is going to stay. There is no plan to change. But there is a way if you invest in REITs and InVits (REITs, or real estate investment trusts, or infrastructure investment trusts), there is a way to save from this tax. If it is investment-oriented, then you have a way to be away from DDT ", Garg said.
Finance minister Nirmala Sitharaman has proposed closing the buyback route used by corporates to avoid paying taxes. Earlier, corporates preferred using the buyback route after the government levied a dividend distribution tax of 10 percent in 2007, which was further hiked by a similar quantum in 2016.
In the last three years, more than 170 companies, mainly in the IT sector, have bought back shares worth Rs 1.33 lakh crore. A number of IT sector companies, including Infosys, Wipro, and Tata Consultancy Service, have in the recent past announced big buybacks.
Finance minister Nirmala Sitharaman has now plugged this loophole by taxing buybacks at the rate of 20 per cent, similar to those applicable on unlisted companies.
Taxation of dividends
Dividends paid by a domestic company are subject to dividend distribution tax (DDT) at 15 percent of the aggregate dividend declared, distributed or paid. The DDT payable is required to be grossed up. The effective rate is 20.3576 percent, including a 12 percent surcharge and a 3 percent education cess.
Garg said the domestic market is crowded due to government borrowings, so, the private sector is unable to borrow. If government even borrows 10 percent from abroad, it will free Rs 70,000 crore for private companies.
He further said a 5 trillion dollar economy is achievable if the economy grows at 8 percent per annum and with 4 percent inflation, 12 percent nominal growth rate, 1-1.5 percent depreciation of the rupee vis-a-vis dollar value and the growth is doable and pragmatic.
Stressing the continuation of fiscal deficit path of 3.3 percent , the secretary said the government has opened up many sectors such as insurance and has also raised foreign portfolio  investment (FPI) limits of 24 percent subject to sectoral caps. The $5 trillion investment path will be led by private sector, he said .
To attract more global investment, the government will consider further opening up of foreign direct investment (FDI) in aviation, media, animation, and the insurance sector in consultation with stakeholders.
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