Boon for companies, bane for shareholders
I DIVIDEND DISTRIBUTION TAX
Finance Minister Nirmala Sitharaman on Saturday granted the stock market a long-pending wish — scrapping of dividend distribution tax (DDT).
However, the measure came with a twist, leaving a bitter taste on investors, particularly those falling in the higher income tax slabs.
While the Centre abolished DDT, dividends will now be taxed in the hands of recipients at their applicable rate — which can be as high as 43 per cent for the ultra-rich.
“This is another bold move which will further make India an attractive destination for investment,” said Sitharaman. She said the government has forgone estimated annual revenue of ~25,000 crore by abolishing the DDT and the move will increase the attractiveness of the Indian equity market.
Under the existing regime, a company declaring dividend has to pay 15 per cent DDT (17.64 per cent, including surcharge and cess), while the recipient has to pay an additional tax of 10 per cent if the total dividend exceeds ~10 lakh in a fiscal year.
Experts said besides companies, DDT removal will benefit foreign investors, multinational companies (MNCS), holding companies and investors in the lower income tax bracket.
On the other hand, it will end up hurting domestic promoters and individuals falling in the 30 per cent-plus tax bracket.
While dividend payouts by companies will go up, the net realisation for these investors could be lower.
The move to remove DDT comes within months of the Centre lowering corporation tax from 30 per cent to 22 per cent. Both these measures could provide a boost to India Inc’s financials at a time when the economic slowdown has been weighing on growth.
“The widely expected removal of DDT completes the revamping of the corporate tax structure in India and truly makes India one of the most attractive investment destinations in the world. This step alone should considerably improve the return on equity for foreign investors in Indian companies,” said Sudhir Kapadia, national tax leader, EY India.
The tax structure for the domestic markets is considered to be one of the highest globally with taxes such as DDT, long-term capital gains tax and securities transaction tax.
“Moving to globally-accepted regime for shareholder taxability in terms of dividends is also equitable and benefits most taxpayers, including MNCS,” said Vivek Gupta, partner, KPMG India.
The current regime pinched foreign investors, particularly due to non-availability of DDT credit, which led to multiple tax incidence.
Interestingly, MNCS will end up making higher return on their investments than domestic promoters under the new tax structure.
To illustrate: Suppose, a company has ~1,000 as surplus income pre-tax which has to be given as dividend. At present, the company has to pay about ~850 post DDT. Furthermore, the promoter has to pay ~10 as additional tax on every ~100 of dividend received.
Under the new regime, the company can now pay the entire ~1,000 to shareholders.
However, promoters will have to pay ~43 on every ~100 dividend received.
Market players said, given the change in dynamics, cash-rich companies may opt for buybacks over dividends, as a promoter-friendly measure. Share buybacks had lost appeal this fiscal year following the introduction of 20 per cent buyback tax.
The Centre has not tinkered with this new tax introduced in last year’s Budget. In the previous two fiscal years, the domestic markets had seen record amount of buybacks.