Promoters of India Inc and big-ticket retail investors have been hit hard the second time in two consecutive budgets with the government scrapping the dividend distribution tax (DDT).
Tax liability on the dividend received by promoters and big-ticket retail investors — who are in the super-rich taxpayers category — jumps by as much as 23% post-budget, according to a PwC Analysis for DH. Before the tax was scrapped, the government used to charge the payer of the dividend — the company — an effective tax rate of 20.56% including the cess and surcharge.
However, after the DDT is scrapped, the government will charge a tax rate applicable in the tax slabs of the investors — which is 42.74% in the case of super-rich individuals with income in excess of Rs 5 crore.
Experts believe that DDT abolition comes as a boon to corporates but bane for promoters, who have been already hit by the increased surcharge on them in the Budget 2019.
“The government on Saturday proposed to remove DDT on companies and henceforth the tax will be shifted to the recipient at the applicable tax rates. Those taxpayers whose personal effective rate of tax was 20% or less would stand to gain, else it would cost more, and the super-rich paying tax at the rate of 42.74% would be hit the hardest,” said Ravi Jain, partner, Personal Tax, PwC India.
On Saturday, Finance Minister Nirmala Sitharaman announced scrapping the dividend distribution tax (DDT) in the Budget 2020.
The government had increased the surcharge levied on top of the applicable income tax rate from 15% to 25% for those with taxable incomes between Rs 2 crore and Rs 5 crore, and to 37% for those earning more than Rs 5 crore, taking the effective tax rate for them to 39% and 42.74%, respectively.
Meanwhile, the Central Board of Direct Taxes (CBDT) has clarified that the tax would be charged on dividend income, and not the capital gains.