News Excerpt
In order to increase the attractiveness of the Indian Equity Market, to provide relief to a large class of investors and to make India an attractive destination for investment, the Union Budget 2020-21 proposed to remove the Dividend Distribution Tax.

Pre-Connect
●    The Dividend Distribution Tax (DDT) is a tax levied on dividends that a company pays to its shareholders out of its profits.
●    It is taxable at source, and is deducted at the time of the company distributing dividends. The dividend is the part of profits that the company shares with its shareholders.
●    The law provides for the DDT to be levied at the hands of the company, and not at the hands of the receiving shareholder. However, an additional tax is imposed on the shareholder, who receives over Rs. 10 lakhs in dividend income in a financial year.
●    DDT was first introduced on domestic companies in 1997. Prior to that, dividends were taxed only at the hands of shareholders.   

Analytica
⮚    The government’s proposed move to scrap the DDT and instead tax dividends only in the hands of the investor at the rate applicable to the investor’s income bracket is sensible. It will encourage higher dividend distribution, leaving money with shareholders and making India an attractive destination for investment.
⮚    According to the finance minister, levying DDT results in an increase in tax burden for investors and especially those who are liable to pay tax less than the rate of DDT, had the dividend income been included in their income. Foreign investors, too, don’t end up getting credit on the Indian withholding tax against tax payable in their home country, and this lowers the rate of return on equity capital.
⮚    Companies at present pay a DDT at the rate of 20.56%. This is paid in addition to income tax. Individuals who receive dividend income in excess of Rs 10 lakhs pay a dividend tax of 10%. So, dividends bear a tax of 25% at most, and this is not an equitable way to tax people.

Conclusion
Abolition of DDT will thus benefit taxpayers as net receipt in their hands after taxes will increase. Moreover, the abolition of the DDT, would benefit companies in the long run, as by removing DDT, the quantum of profit available for distribution would get significantly enhanced.   

When is the Dividend Distribution Tax paid?
    The tax has to be paid to the government within 14 days of the dividend declaration, distribution or payment whichever is earliest.
    If DDT is not paid within the given time period, interest at a rate of 1 per cent per month or part thereof starts getting accumulated till the amount is paid. The tax is paid separately, over and above the company’s income tax liability.
    The income tax law doesn’t provide for any deduction or credit to the firm for paying the DDT.
    Similarly, a taxpayer gets no deduction with respect to any expenditure or allowance or set-off of loss under the Act in calculating the income through dividends.

PEPPER IT WITH
Finance Act, Securities Transaction Tax (STT), Long-Term Capital Gains (LTCG) tax.