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In Favour Of Abolishing Dividend Distribution Tax

In Favour Of Abolishing Dividend Distribution Tax

In Favour Of Abolishing Dividend Distribution Tax
(Wikimedia)

In its Pre– Budget Memorandum for 2016-2017, the National Real Estate Development Council (NAREDCO) has asked for the abolishing the Dividend Distribution Tax. Real Estate Investment Trusts (REITs) have not been able to take off in India primarily because of the DDT. Apart from that, this double form of taxation also curbs investment by companies abroad.

What is DDT?

Under DDT, a company first pays the corporate tax on its profits at 33 per cent. After that a DDT at 16.9 per cent is charged, when the profits are distributed to their rightful owners i.e. the shareholders. No credit or refund can be claimed by shareholders or companies under this taxation. This double taxation prevents many companies from announcing adequate dividends, hurting shareholders' sentiment.

Earlier, the dividend income received by the shareholders was taxable in the hands of the shareholder, and not that of the company. Shareholders had to pay the tax on this income at a rate varying between 0-30 per cent. Theoretically, the dividend is tax free in the hands of the shareholder and he need not pay any tax on the same. However, practically tax has already been deducted on the dividend. So, shareholders end up paying the price.

Creating divide

The taxation structure in India is progressive which varies from 0-30 per cent. This means the tax liability for people with low-income can be nil and that for people with high income can go up to 30 per cent. However, even if your tax liability is nil or 10 per cent of the income, you would be charged to tax at 16.9 per cent. As a shareholder, you are also not allowed to claim refund or credit over the excess tax.

On the other hand, the well–off people who should have been made to pay tax at 30 per cent on the dividend income are greatly benefitted as they are charged only at 16.9 per cent under the DDT.

Major hindrance to foreign investment

Foreign Institutional Investors (FII) have been pumping money in the Indian markets but the DDT has restricted them from unleashing their true potential.

For example: X, who is based out of Singapore, invested in a company in India and received dividend. X could have paid tax on the dividend income in India and could have claimed credit for the tax in his home country. However, this tax credit can be claimed by X only if he can satisfy the tax authorities in Singapore that tax has been paid by it in India. As X does not have any receipt of the DDT paid, he won't be able to claim tax credit in its home country.

As the DDT is paid directly by the company in India, FII or any other foreign investor does not have any proof of tax paid here. Subsequently, they are again required to pay tax on the dividend income in their home country. This anomaly keeps them out from investing in Indian markets.

Abolition of the DDT will propel the investor confidence and ambitious schemes like REIT would be successful.  Not only the real estate sector but also the entire business community that would be benefitted by the abolition of DDT.

Last Updated: Fri May 27 2016

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@@Fri Jul 05 2019 13:15:19