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Dividend Income Tax Rate Being Slashed?




The Government is looking to slash the Dividend Income-Tax Rates by half. It has been planning to make amends to reduce DDT or Dividend Distribution Tax. The government is considering bringing down the effective Dividend Tax Rate from 43% to 20%. This new rate will be applicable to the domestic individual investors (HNIs) and may benefit the individuals in the highest tax bracket.

Earlier, DDT was 20% taxable in the hands of the company, which made it a pure cost. In Budget 2020, FM Nirmala Sitharaman removed this 20% DDT on companies, making it taxable at the hands of the investors. Shareholders have to pay tax as per their respective tax slabs. And after including the surcharge and cess, the highest bracket results in a 43% tax outgo.

Currently, Foreign Companies (FIIs) have to pay anywhere between 5% to 15% tax on Dividend Income. This varies depending on the tax treaty that India has with a particular foreign country. In comparison to the Foreign Companies, the Local Investors (in the higher income bracket) pay a tax of 43%. Several associations and investors have voiced their opinions about this anomaly. Thereby, seeking regulation on Dividend Income-Tax Rates. The Government has been trying to take the opinions of Senior Revenue Officials, Prominent Mutual Funds, Tax Advisors and Lawyers.

As per treaties the tax rate would be 15% for Mauritius and Singapore, 25% for the US and Canada and 10% plus an additional 5% depending on parameters like Most Favored Nation (MFN) status, etc.

“There is a difference of 22% between tax on dividends paid by a foreign company and by an Indian promoter and this has led to a situation where domestic companies are rushing to pay dividends before April 2020. Bringing parity between tax on dividend paid by Indian companies and foreign companies is a good move and will bring in ease of doing business,” said Girish Vanvari, founder, tax advisory Transaction Square.

Even after the government removed DDT and made it more like TDS, several foreign companies that invest through other countries end up paying taxes as low as 5%. The tax rates continue to remain substantially high for individuals in India and FPIs registered as trusts. This is creating a lot of unease among the Local Investors.

Even as the bears hold global markets at present, there is some chance that this may provide some relief.

Thus, the government may offer the concession by offering a flat 20% tax on dividend income. Stay tuned for the updates….

Source – Economic Times.

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