Budget 2020: Abolition of DDT may broaden capital market investor base

The abolition of dividend distribution tax (DDT) is expected to broaden the capital market investor base.
 
It will improve dividend payout by companies. Hence, hoped a source in the government, “encourage lower-income group people (annual income up to Rs 5 lakh) to invest in the capital market, as there is no tax liability on dividend for them, as against over 20 per cent paid by them under the previous regime”.
 
Currently, three per cent of the country’s population invests in this market.
 

However, on Saturday, the stock markets did not react positively, contrary to the government’s expectation. Instead, the benchmark indices fell over 900 points. Official sources said the dividend regime was scrapped as a single rate of taxation invariably favours taxpayers in the higher brackets. Further, non-residents were taxed at a higher rate than the treaty rate, and they could not claim tax credit in their home country. Further, the new move is expected to encourage the debt mutual fund market. For, most individuals would now pay tax at a lower rate on income received from debt funds, in comparison to the earlier rules.

 
A person with total annual income up to Rs 5 lakh will not have to pay dividend income, as against 20.56 per cent paid by them through indirect means. The source quoted earlier explains that the 15 per cent DDT rate came to a gross 17.65 per cent; after surcharge of 12 per cent and cess of four per cent, this became 20.56 per cent.
 
Also, a resident was required to pay tax at 10 per cent along with surcharge and cess if dividend income in a year exceeded Rs 10 lakh.
 
Sources say only a few countries — Australia is one — allow credit of tax paid by a company while taxing dividends in the hands of  shareholders. All other nations tax dividend in the hands of shareholders or at a flat rate of 10 per cent to 30 per cent.