The cost of doing business in India could come down if the dividend distribution tax (DDT) levied on foreign shareholders is replaced with a withholding tax as under the current system, apex chamber Ficci has said. According to the chamber, foreign shareholders are unable to claim credit in the home country for DDT paid in India, resulting in a higher effective tax rate. Ficci feels this would tantamount to imposing an additional business cost for doing business in India.
Ficci has recommended a split kind of system whereby DDT is levied on domestic shareholders and withholding tax on foreign shareholders. Else, an option be made available to the shareholders to choose between DDT and withholding tax, it suggests. The suggestion, being tax neutral, would not result in a revenue loss to the exchequer.
Further, DDT on domestic shareholders is seen by industry as a surrogate tax paid on behalf of the shareholders. Its cascading effect in multi-layered corporate entities and high tax rate of 15% is seen as a major irritant in corporate financial restructuring and engineering.
While the Finance Act 2008 did initiate steps to mitigate its impact by providing that domestic holding company will not have to pay DDT on dividends paid to its shareholders to the extent it received dividends from its subsidiary company on which DDT has been paid by the subsidiary, inter-alia providing that the benefit will not be available if the holding company is itself a subsidiary of another company. In other words, the reduction benefit is available only up to one level. It has been further clarified that for this purpose, a company will be called a subsidiary of another if such other company holds more than half the nominal value of equity share capital of the company. Also that the same amount of dividend shall not be taken into account for reduction more than once.
It is high time that this DDT is replaced with TDS (withholding tax) because flat rate of 10% is collected from companies treating the rich and the poor share holders alike. Instead if the same is TDS and the receipiant is allowed credit the assessee who is in the higher bracket will pay additional tax and the assessee who is in the lower bracket will subjected to low tax. To safegaurd the interests of the small investors deduction may be allowed upto Rs.25,000/- for income from dividends and they can claim refunds if their income is below the limits. Similar deduction was in vogue under section 80L till recently. Likewise deduction may be allowed for interest from Banks upto Rs. 25,000/-. This will encourage people to have more deposits with Banks and save assessees from the botheration of offfering the meagre amount of interest they earn from Savings Bank Accounts.