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DDT is gone! Big Budget move for stock markets

DDT is a surrogate tax and it obstructs the flow of FDI. Doing away with this tax can give a major push to investment.

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Last Updated: Feb 03, 2020, 09.09 AM IST
Budget 2020: Dividend Distribution Tax abolished, says FM Sitharaman
Budget 2020: Dividend Distribution Tax abolished, says FM Sitharaman
In the Union Budget presented on Saturday, FM Nirmala Sitharaman proposed to remove the deeply unpopular dividend distribution tax (DDT).

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.

According to industry and markets, dividend distribution tax is a surrogate tax and it obstructs the flow of foreign direct investment. Therefore, doing away with this tax can give a major push to investment.

The abolition of this tax can also boost market sentiment and make Indian equities more attractive.

The clamour had been growing for the abolition of DDT ever since the corporate tax cut in September. The task force on the direct tax code had also recommended scrapping this tax in order to boost investments.

Domestic companies at present are subject to DDT at 15 per cent of the aggregate dividend declared, distributed or paid. As it also includes a 12 per cent surcharge and a 3 per cent education cess, the effective DDT rate comes to 20.35 per cent.

Nirmala Sitharaman had introduced this provision in last year's Budget with a view to clamping down on the strategy of avoiding DDT through buying back of shares by listed entities.

Analysts say that even if DDT is removed it would take no big toll on revenue, because any loss whatsoever in revenue gets offset by the tax that shareholders pay.

A dividend is the sum that 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.

The tax on dividends is a triple levy. Dividend basically means the distribution of a company's after-tax profits. The tax paid by a company is the first level. DDT is the second level. The recently-introduced Super Rich Dividend Tax — the 10% tax on anyone who earns dividend income of Rs 10 lakh or above — is the third.

DDT applies to mutual funds as well. Because fund houses deduct DDT at source, dividends from MF schemes are tax-free for shareholders.

The DDT for debt funds is 25% for individuals and 30% for corporates. For equity MFs, the rate is 10% (along with surcharge and cess, it comes to 11.648%).

DDT was introduced for more efficient dividend tax collection from companies rather than shareholders.

Currently, no other country in the world has a DDT regime. Even in India, it was only in 1997 that DDT was made a part of income tax laws. The tax was scrapped in 2002, but was brought back in the very next year on the pretext of ease of tax administration.

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