The Finance bill 2020 proposed to abolish dividend distribution tax (DDT) which may result in boost in dividend pay-outs in corporates.
A dividend is the share, a company pays its shareholders from the profits it earns, and DDT is the tax levied on that dividend. Only a domestic company is liable to pay this tax. Even a company that is not liable to pay any tax on its income has to pay the dividend distribution tax. DDT was introduced for more efficient dividend tax collection from companies rather than shareholders.
At present DDT is payable at effective rate of 20.56% on dividends proposed to be paid to the shareholders. Excluding specified residents these dividends are not taxable in the hands of recipient.
Dividend income from shares and MFs will be now be taxable in the hands of the recipient instead of the company of MF house at applicable income tax rates.
The Finance Bill, 2020, also addresses the cascading effect of tax on dividends received by a domestic company from another domestic company. The DDT, which was originally introduced at 7.5% in 1997, and currently stands at 20.56%.
The discontinuation of DDT is a welcome move for foreign investors. Non-availability of credit of DDT to most of the foreign investors in their home country results in reduction of rate of return for them. Therefore, in order to increase the attractiveness of the Indian equity market and to provide relief to investors, the Budget 2020 has proposed to abolish the DDT. The dividend shall be taxed only in the hands of the recipients at their applicable rate.