The Modi government on Sunday clarified in a note that the move to abolish DDT is aimed at addressing the issue of inequity in dividend taxation and to provide relief to non-residents.
A day after the Budget 2020 shifted dividend distribution tax (DDT) to individuals from companies, the government on Sunday clarified in a note that the move is aimed at addressing the issue of inequity in dividend taxation and to provide relief to non-residents. Finance Minister Nirmala Sitharman on Saturday proposed in the Budget 2020-21 to make dividend income from shares and mutual funds taxable at the hands of the recipient at the applicable personal income tax slab rates.
Hitherto the company or mutual fund house was levying the Dividend Distribution Tax (DDT) at 15 percent on the gross amount of dividend income. DDT is a tax that is applicable on income from dividend given to shareholders by a company or corporation.
The effective rate of DDT is 17.65 percent, excluding surcharge and cess. Taking the impact of surcharge at 12 percent and cess at 4 percent, this comes to 20.56 percent. In addition, a resident (other than company) was required to pay tax at 10 percent plus applicable surcharge and cess if the dividend income in a year exceed Rs 10 lakh.
Explaining the intent behind this move, the government note said that the move eases tax collection at one place and also reduces compliance burden on companies in issuing so many tax deduction certificates. Major economies of the world such as Canada, Japan, United Kingdom, China, Germany, France and many others tax dividend in the hands of shareholders either at applicable rate or at flat rate ranging from 10-30 percent.
Calling the new dividend tax regime as a fair system, it says a “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.”
The new system gives relief to non-resident as under the old system “non-residents were taxed at higher rate than the treaty rate with possibility of no tax credit in the home country.”
Likewise on income from debt funds, which was earlier charged at 25 percent for an individual or Hindu undivided family (HUF) and 30 percent for others, individuals would pay tax at applicable income tax rate.
The new system would encourage debt mutual fund market in India, the note said. Low income earners who were earlier charged a 20.56 percent DDT or tax on dividend income can now save money or invest in capital markets.