The Union Budget 2020 (‘Budget 2020’) was presented by the Honorable Finance Minister on 1 February 2020. All had set their eyes to witness what this Budget would unveil for reviving Indian economy.
At the introduction of the speech, the Honorable FM mentioned that the existing Government wishes to open up vistas for a vibrant and dynamic economy. With a view to giving impetus to foreign investments into India, one of the key amendments proposed is the abolition of Dividend Distribution Tax (‘DDT’). DDT is currently payable by domestic companies / mutual funds on the dividend declared, distributed or paid by them. Once this amendment becomes law, there would be a shift in taxation into the hands of the shareholders / recipient of dividend income. The shareholders would then be required to pay tax on the dividend income at applicable rates.
DDT was primarily introduced with the intention of easing out the collection of tax on dividend at a single point (i.e. at a distributing company level), rather than collecting it from various shareholders. DDT enabled not only ease of collection of tax but would also avoid leakage of tax and reduce tax compliance burden for the shareholders.
At present, domestic companies are liable to pay DDT at 15 per cent (plus applicable surcharge and cess) of the aggregate dividend declared, distributed or paid. The effective DDT rate after considering surcharge and education cess, currently stands at 20.56 per cent. Such payment of DDT is treated as the final payment of tax in respect of such dividend paid to non-residents. However, in most cases involving foreign investors, credit for DDT is not available in their home countries, which ultimately results in a reduction of rate of return on equity capital.
Under the extant provisions of the Income-tax Act, 1961 (‘the Act’), the resident shareholder (other than domestic companies, fund specified under Explanation to section 115BBDA of the Act and trust registered under section 12A or section 12AA of the Act) is required to pay tax at 10 percent (plus applicable surcharge and cess) on dividend income exceeding INR 1 million.
In view thereof, there had been representations from foreign investors seeking abolition of the DDT, to enhance foreign direct investments into India.
The key impact of the above amendments proposed to the Act in respect of dividend distributed by domestic companies are as under:
|Particulars||Foreign investors||Domestic investors|
|Withholding||At lower of tax treaty rate or rates in force (as per section 195 of the Act)||At 10 percent (on payments above INR 5,000.|
|Taxability||At lower of tax treaty rate or 20 percent*. Beneficial rate under the tax treaty may be availed, if TRC and other requisite documents
|Credit for taxes paid in India||Available in the country of residence, based on relevant country domestic law.||Available|
Obliteration of DDT regime shall be beneficial for the foreign investors as it will minimize tax cost of investment in India and credit of such tax cost would be available in home country. However, in respect of foreign investors being discretionary trust and AOP, rate of tax applicable may be the maximum marginal rate, which shall be substantially higher than tax rate for foreign companies, unless treaty benefits are available.
– Total income lower than INR 10 lakhs – Obliteration of DDT is beneficial;
– Total income between 10 lakhs and 12.5 lakhs – Obliteration of DDT would have no impact;
– Total income above 12.5 lakhs – Obliteration of DDT may be detrimental.
– Total income between 10 lakhs and 15 lakhs – Obliteration of DDT is beneficial;
– Total income between 15 lakhs to 50 lakhs – Obliteration of DDT would have no substantial impact;
– Total income above 50 lakhs – Obliteration of DDT may be detrimental.
The above amendments are a welcome step for foreign investors. It is earnestly hoped by the Honourable Finance Minister and the ruling Government that this proposed move will boost foreign investments into India due to the applicability of the lower beneficial rates prescribed under the tax treaties for foreign investors (instead of the higher prevailing rate of DDT) and the future availability of foreign tax credit in relation to tax on dividends paid by them in India. However, on the flip side, the amendment could also deter the sentiments of the domestic individual shareholders. Possibly, abolishing DDT coupled with elimination of long term capital gains tax on transfer of listed shares (which was introduced vide Finance Act 2018) would have made a more positive impact from the eyes of domestic investor. Was it all a shade too less to help the situation, or was it just sufficient? Will this prove to be a game changer or will it be seen as a disappointing anti-climax? Well, only time shall unfold all of this.
(Authored by Ashesh Safi – Partner, Kripa Ray – Manager and Karan Vakharia – Deputy Manager at Deloitte Haskins & Sells LLP, Mumbai. The views expressed are strictly personal)