In February 2020, India’s finance minister Nirmala
Sitharaman proposed to scrap the Dividend Distribution Tax (DDT), payable by
both Mutual Fund houses
and companies. Instead, the tax will be levied at the end of individual
taxpayers. The government
has introduced TDS of 10% on dividend income, provided the amount is more than
Rs. 5,000 in a given Financial Year. The finance minister, in her
budget speech, made it clear that the dividend income would be taxable
according to the applicable tax slabs of individuals.
The manifold changes, in the
offing, after the proposed budget 2020 underlines the importance of wealth
management services for selecting the right investment plans, including tax saving mutual fund investments.
DDT was introduced in 1997,
and Section 115 O of the Income Tax Act provided for its regulation. According
to the provisions, an Indian
company had to pay 15%
of the gross amount of dividend within 14 days of its declaration, payment or
distribution. After addition of surcharges and cess, the actual rate increased
to 20.5%.
In the case of Mutual Funds, the DDT was applicable at the rate of
25% on debt-linked Mutual
Funds. The surcharge and cess further increased it to 29.12%. From 2018
onwards, equity-linked Mutual
Funds were taxable at the rate of 10% plus surcharge.
As per the earlier rules,
individual taxpayers had to pay tax at the rate of 10%, only if the dividend income was more
than Rs 10 lakh in a financial year.
The removal of DDT will have a widespread impact on
various stakeholders, including domestic companies, MNCs, investors, promoters
and foreign investors. Read on to know about the impact:
For both domestic companies
and MNCs, this means reduced costs of business. This is because the dividend
paying companies had to pay more taxes because of the cascading effect created
by double taxation. In addition to the 30% taxation on Profit before Tax (PBT),
they had to pay DDT from profits. Further, even after having paid DDT by their
Indian subsidiaries, MNCs could not claim foreign tax credit in their home
jurisdiction. This resulted in higher costs, often prompting the MNCs to seek
various innovative measures for repatriating profits. With the removal of DDT,
market experts predict a boost in foreign investments in India.
For retail investors in the
tax slab bracket of less than 20%, removal of DDT will have a positive effect,
as they would end up paying lower taxes. For investors in the 20% bracket, the
tax structure will remain unchanged as companies had hitherto paid dividends
after deducting 20% as DDT. Instead, these investors have to now pay 20% taxes
on the dividend income. For retail investors above the 20% tax slab bracket,
however, the impact will be negative, as they now have to pay higher taxes on
the dividends received. The impact will be highest for those in the 43% tax
slab bracket.
Those Mutual Fund investors, who have opted for
dividend plans, and in the higher tax bracket, would also have to pay higher
taxes. As per market experts, a way out could be opting for growth Mutual Fund investment plans
instead of dividend plans. For better cash flows, experts suggest opting for
Systematic Withdrawal Plans (SWPs). For Mutual Fund houses, removal of DDT will
have a salutary effect, as they would see an increase in dividend yields. This,
in turn, would result in Net Asset Value (NAV)-appreciation.
Foreign investors living in
tax-haven countries would benefit from the removal of DDT, while the impact on
foreign investors in countries having Double Tax Avoidance Agreement (DTAA)
with India, would be neutral. As for promoters in the high tax bracket, this
would again result in higher taxes. High dividend paying companies with a
concurrent high promoter stake are expected to set aside profits as retained
earnings, instead of paying dividends. This could then be channelised into
higher capital expenditure and expansion of business, which would improve
businesses and create new employment opportunities. In the long-run, this would
have a positive impact on India’s Gross Domestic Product.
Thus, removal of DDT will encourage foreign investments, while simultaneously transforming India into a favoured destination for doing businesses. Countries, including China, Japan and the USA already have a similar tax structure, sans DDT . Amidst the changes in the tax structure, as announced in the budget proposals, selecting the right investment plan now becomes an issue of paramount importance. You can zero in on Tata Capital’s wealth management services, which has a dedicated team of experienced professionals to guide you through the best investment plans.
17 April 2020
4 mins read
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