Budget 2020 India: In her second budget presentation, Finance Minister Nirmala Sitharaman Saturday abolished the Dividend Distribution Tax (DDT), while making dividends taxable at the hands of the recipients. The move may be good for companies, which won’t have to pay tax on dividend payments; however, it’s not so good news for investors, who may have to end up paying higher tax than before. DDT removal is a good move as it increases dividends received in the hands of the taxpayer, Archit Gupta, Founder, and CEO, Cleartax, said. “However, such receipts [will] now be taxable in the recipient’s hands. Those above 20% tax slab will now face more tax on their dividend income,” Archit Gupta added.

The government’s decision to do away with DDT stems from the hope that removal of this tax will make India an attractive investment destination for foreign investors. “In order to increase the attractiveness of the Indian Equity Market and to provide relief to a large class of investors, I propose to remove the DDT and adopt the classical system of dividend taxation under which the companies would not be required to pay DDT,” the Finance Minister said.

For sure, the move will likely benefit the markets, with companies now being freed from the burden of being taxed on the dividend paid by them, leaving them about 20.56% more money. Abolishing DDT will lead to higher cash flows in the hands of cash-starved India Inc, said Jaideep Hansraj, MD & CEO Of Kotak Securities.

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On the other hand, it will make dividends costlier for investors and recipients in higher tax brackets, since the dividend will be added to people’s incomes, and will be taxed at the marginal slab rate. “Under the new regime, dividend income would be taxed at the normal tax rate applicable as per slabs. Therefore, for individuals who were earlier in 20% or higher tax slabs, it may be a higher tax outgo,” Shailesh Kumar, Director, Nangia Andersen Consulting.

Currently, companies are required to pay Dividend Distribution Tax (DDT) on the dividend paid to its shareholders at the rate of 15% plus applicable surcharge and cess in addition to the tax payable by the company on its profits. There was a growing demand to revisit the DDT after the government decided to revise corporate tax rates. The sum that a company pays its shareholders from profits earned in a particular year is called a dividend. DDT is the tax levied on the payout of that dividend. Only domestic companies are liable to pay this tax.

Here are other quick takes on abolition of Dividend Distribution Tax:
“Continuing with the theme of simplification with reduced tax rates, the Budget has proposed the phasing out of several provisions of deduction/exemptions. The abolition of DDT has aligned policy with the legislation in so much as it removes the hardship on small taxpayers.” – Frank D’Souza, Partner and Leader, Corporate & International Tax, PwC India

“The FM has accepted the demand of the industry to reverse the taxability of dividends back to the recipients.” – S R Patnaik, Partner & Head – Taxation, Cyril Amarchand Mangaldas

“Markets have taken a cautious view on the budget, the tax rate cut and DDT benefit will help economy to grow and corporate payouts to increase, at these levels one should buy for long term.” – Motilal Oswal, Managing Director & CEO, Motilal Oswal Financial Services.