Budget 2020

India Inc to be relieved; DDT abolished

Rajalakshmi Nirmal BL Research Bureau | Updated on February 01, 2020 Published on February 01, 2020

The value of buybacks in the market has increased sharply in recent times.   -  leolintang

 

What changed?

Having done enough for corporates in 2019, the Finance Minister focussed on individual tax payers in the 2020-21 Budget. However, the one move which is noteworthy with respect to corporates is the move to remove dividend distribution tax. With effect from 2020-21, dividends paid by companies will be tax exempt in the hands of corporates and taxed in the hands of shareholders (note: companies would be deducting TDS at 10 per cent in case of payouts of over ₹5,000, so individuals can’t escape by not disclosing them). In last year’s Budget, the Finance Minister announced taxing buybacks. Now, with the current move there are more reasons for India Inc to consider dividends over buybacks. The value of buybacks in the market has increased sharply in recent times. In 2019, it was ₹43,405 crore, up from ₹32,385 crore in the previous year as per nseinfobase.com.

Background

In 2015 former finance minister late Arun Jaitley had announced that the corporate tax rate would be cut in a phased manner over a four-year period. While the promise was to bring it to 25 per cent, last year, in September, Finance Minister Nirmala Sitharaman announced a steep cut in the tax rate and brought the rate down to 22 per cent for all those who do not avail of tax incentives. 

Further, she also provided a lower corporate tax rate of 15 per cent for new manufacturing companies incorporated after October 1, 2019. That said, it has not been a happy last few years for big corporates as their effective tax rate has only been going up. From 23.22 per cent in 2013-14, the effective tax rate for India Inc increased to 29.49 per cent in 2017-18. The Centre managed to collect more taxes despite cutting the tax rate, thanks to an increase in the surcharge on corporate tax (effective 2015-16) and the phasing out of various tax incentives and profit-linked deductions.

In the 2019 Budget after throwing carrots to India Inc for many years, the Finance Minister brought the stick. She announced taxing of share buybacks of listed companies at 20 per cent — which came to an effective 23.3 per cent, including surcharge and cess. Listed companies that were taking the buyback route instead of dividends to save on tax were caught.

Till last year, the amount distributed as dividend was taxed in the hands of the companies at 15 per cent plus the applicable surcharge and cess, totalling an effective rate of 20.5 per cent (now, that’s completely gone!). 

It is interesting to note that in 2018-19 the effective tax rate for corporates has come down to 27.84 per cent — the effect of sliding tax rates for a larger bunch of companies. Comparing 2017-18 and 2018-19, we see that the maximum benefit has gone to SMEs and MSMEs. The effective tax rate for companies making a profit of ₹1-10 crore has come down from 27.38 per cent to 26.43 per cent; companies making a profit of ₹10-50 crore have seen their effective tax rate drop from 29.09 per cent to 27.68 per cent.

Verdict

India Inc can’t ask for more. On one side, tax rates have come sliding, on the other, the anomaly with respect to dividend distribution tax has also been corrected. Foreign companies whose Indian subsidiaries were losing out because there was no credit for the DDT paid by them can also heave a sigh of relief now.

Published on February 01, 2020
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