Budget 2020-21: Giving in to the long-standing demand of investors, the FM proposed to abolish the DDT, which will now be taxed in the hands of shareholders.
Budget 2020-21: Finance minister Nirmala Sitharaman’s Budget for 2020-21 failed to cheer markets on Saturday, even as she proposed to remove the dividend distribution tax (DDT) on companies and also announced several measures to attract foreign investments. The Sensex crashed over 1,000 points to close below the 40,000-mark, as investor sentiment was dampened by the government’s refusal to do away with the long-term capital gains tax, which was imposed in 2018. The lack of specific measures to revive the economy also led to a sell-off. Investors lost nearly Rs 3.5 lakh crore on Saturday, while foreign investors sold shares worth $168 million.
Giving in to the long-standing demand of investors, the FM proposed to abolish the DDT, which will now be taxed in the hands of shareholders. Currently, the DDT is paid by companies before distributing it to their shareholders. The prevailing tax rate on dividend works out 20.35% (including cess and surcharge), irrespective of the tax liability of the receiver. However, with the government reversing the taxability of dividends back to the recipients, those who earn more than Rs 12.5 lakh a year will end up paying more as tax.
While domestic investors had little to cheer about, the FM announced several measures for foreign portfolio investors (FPIs), including tax concessions. In order to incentivise the investment by the sovereign wealth funds of foreign governments in priority sectors, the FM granted 100% tax exemption on their interest, dividend and capital gains income in respect of investments in infrastructure and other notified sectors before March 31, 2024, and with a minimum lock-in period of three years.
Shagoofa Rashid Khan, partner & head – funds, investment & advisory, Cyril Amarchand Mangaldas, says the proposal of tax exemption to sovereign funds has a bite in its tail. “…many large institutional investors active in India such as pension plans or investment arms of various governments do not qualify as specified persons under Section 10(23FE).”
In order to make available foreign funds at a lower cost, the FM proposed to extend the period of concessional withholding rate of 5% under Section 194LC for interest payment to non-residents in respect of money borrowed and bonds issued up to June 30, 2023.
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All these, however, failed to revive investor sentiment, as there were several other measures which evoked negative reactions from the market. The market believes that the abolition of exemptions, which encourage investments in mutual funds and insurance, could be at risk now. Dhiraj Relli, CEO of HDFC Securities, said: “The markets have reacted negatively to the Budget, mainly due to some disappointments on account of non-abolition of LTCG, confusion about the impact of DDT removal and taxing dividends in the hands of recipients.”
The Sensex shed 987.96 points or 2.4% to settle at 39,735.53 points, while the broader Nifty ended the day at 11,661.85, down 300.25 points. The Bank Nifty tanked 1,012.70 points to mark its biggest single-day fall since August 2015.