Under the current tax regime (until March 31, 2020), companies distributing dividends are liable to pay tax at an effective rate of 20.56 per cent directly to the government from their surpluses. Effectively, out of every Rs 100 in distributable profits, companies had to cough up Rs 20.56 as tax, with only Rs 79.44 left for distribution to shareholders.
The above rules make the government’s job of collecting taxes easy, it results in all the shareholders of a company suffering a uniform tax rate on their dividends.
The abolition of the DDT puts an end to this broad-brush treatment, by requiring all equity investors to treat their dividend receipts as income and pay taxes on it at their applicable slab rates, as per the classical system of dividend taxation that is widely prevalent globally. While this change enables companies to share their entire distributable profits with shareholders, its impact on dividend receivers is uneven.
There seem to be four distinct sets of gainers from the abolition of the DDT. One, retail investors with a total income of upto Rs 10 lakh a year no longer need to suffer the flat 20.56 per cent imposition on their dividend receipts when their own slab rates are much lower.
Domestic mutual funds/asset managers who enjoy pass-through status and pay no tax can pocket larger dividend incomes from their portfolios, as they will no longer suffer the indirect incidence of the DDT.
Foreign Portfolio Investors (FPIs) structured as corporates can now pay tax on dividends earned in India at either 20 per cent or lower rates, specified in tax treaties inked by their home countries.
Multinationals and foreign companies that receive dividends from their Indian subsidiaries will also enjoy a regime similar to corporate FPIs. Many of them can now claim credit for taxes paid on dividends received in India when assessed for corporate tax back home. This set-off wasn’t available with the DDT.
Who are the losers?
The losers fall into four categories too. One, individual investors in stocks whose income exceeds Rs 10 lakh a year will shell out an effective tax of 31.2 per cent on their dividends, instead of a flat 20.56 per cent under the DDT.
Those whose income tops Rs 50 lakh, Rs 1crore and Rs 2 crore will now find the hefty super-rich surcharges taking a big bite out of their dividend income too. For them, this will mean parting with an effective tax of 34.3 per cent, 35.8 per cent and 39 per cent, respectively, on dividend income.
High net-worth equity investors, promoters of large companies with income of over Rs 5 crore a year will now pay 42.74 per cent tax on their dividend receipts.
Leave A Comment