The Finance Ministry on Sunday expressed hope that new Dividend Distribution Tax (DDT) will encourage lower income tax people to invest in share market.
The Budget has proposed the dividend to be taxed in the hand of recipients as against the earlire practice of levying the tax on companies issuing dividends. In other words, it will be Individual’s tax slab which will decide the tax rate. People falling in the 5 per cent slab, will pay 5 per cent plus cess and so on.
“It would also encourage low income earners to invest in the capital market as the person with total income up to ₹5 lakh will not have to pay tax on dividend income as against 20.56 per cent paid by them indirectly,” a Finance Ministry official said.
Similarly, under the new tax regime, persons with total income from ₹5 lakh to ₹7.5 lakh would pay tax at 10 per cent and persons with total income from ₹7.5 lakh to ₹10 lakh would pay tax at 15 per cent. “All these taxpayers would benefit from abolition of DDT as the tax to be paid by them on their dividend income would be less than what they were earlier paying indirectly through DDT,” the official said.
Under corporate system of taxation, a corporate entity is always a separate legal entity and is taxed in respect of its income. In addition, shareholders are taxed on dividend income received by them [called DDT]. Most countries in the world follow this classical system of taxation.
There are only a few countries like Australia which allows credit of tax paid by the company while taxing dividend in the hands of shareholders.
All other countries tax dividend in the hands of shareholders are levied either at the applicable rate (Canada, Japan, Mexico, New Zealand, United Kingdom) or at a flat rate ranging from 10-30 per cent (Argentina, China, Denmark, France, Germany, Italy, Ireland, Indonesia, the Philippines, Russia, South Africa).
India has always followed classical system of taxation. However, for ease of collecting taxes and to reduce compliance burden on companies in issuing so many tax deduction certificates, it was decided to follow the DDT system of taxation so that the tax is collected at one place.
A single rate of taxation is always iniquitous as it favours taxpayers who are in the higher tax brackets.
Further, non-residents were taxed at higher rate than the treaty rate with possibility of no tax credit in the home country. Hence, the proposal in the Finance Bill, 2020 has not only addressed the issue of inequity in dividend taxation but has also given relief to non-residents.