By Shailesh Kumar
Budget 2020-21: A long-standing demand of corporate taxpayers has been fulfilled in Budget 2020 by abolishing Dividend Distribution Tax (DDT). Companies now have more distributable surplus to distribute as dividend to shareholders. But, does it really grant any benefits to individual taxpayers? It does not appear so.
A domestic company, distributing dividend, was until now, required to pay DDT on the already taxed profit, at an effective rate as high as 20.56% after “grossing up”. Further, investors in receipt of dividend above `10 lakh were required to pay 10% as tax. The finance minister noted that dividend is income in the hands of the shareholders and not in the hands of the company. Moreover, DDT is levied at a flat rate and not the marginal rate to which the recipient is otherwise taxed. Consequently, the incidence of taxation has been proposed to be shifted on the recipient.
Change may not be beneficial
However, the interchange may not prove to be beneficial for individual taxpayers, particularly those in higher tax slabs. Let us suppose a taxpayer has total income of Rs 15 lakh during the previous year and dividend income of Rs 4 lakh from domestic company. In accordance with the erstwhile tax regime, the dividend income would have been subject to DDT at the rate of 20.56% resulting in an approximate tax liability of Rs 80,000. The net dividend income of Rs 3.2 lakh would have been exempt in the hands of the taxpayer (being less than the monetary limit of Rs 10 lakh inviting taxation).
Now, after the proposed amendment, the dividend income of Rs 4 lakh shall solely be taxed in the hands of recipient shareholder at a flat rate of 30% plus Education Cess @4%, resulting in tax outgo of approximately Rs 1.2 lakh. Thus, levy of tax in the hands of the shareholders imposes an additional burden of Rs 40,000 on them in this case.
While the new structure of taxation helps remove cascading effect of taxes and seeks to address the woes of the foreign investors who could not claim credit of DDT, this system will burn a few more holes in the pockets of individual shareholders. Individual shareholders with Rs 12.5-15 lakh income will pay tax at26% and those with income above Rs 2 crore and Rs 5 crore will have to pay taxes at 39% and 42.74% on dividend income, respectively, which was taxed at 20.56% under the erstwhile regime. It shall not be wrong to say that the new tax regime saves hassle, not money.
Some relief needed
It is urged that the government bring a beneficial rate of tax for dividends, say 10%, at least for individual shareholders, in order to give some relief to them and not make this regime a loss making proposition for individual shareholders.
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Another provision which may impact individual investors is introduction of TDS on any kind of income received from mutual fund units, at the rate of 10% under newly introduced Section 194K, if amount of such income exceeds Rs 5,000. The provision in its present form, does not make any specific mention whether such income is only dividend but may also include capital gains.
Further, it will be a big blow to investors if MFs apply TDS on entire redemption proceeds, instead on merely income component. The government must clarify that such TDS of 10% will only apply on income component and not on entire redemption proceeds.
The writer is director, Nangia Andersen. With inputs from Vasudha Arora