tax on dividend distribution: government could halve dividend tax rate for large local investors
The government is seeking to change current regulations to reduce dividend tax from around 20% to 43% for Indian individual investors. The government can offer the concession by offering a 20% flat tax on dividend income.
After a change in the budget, dividend income is now taxable at 43% in the hands of the beneficiary from April of this year.
Foreign companies, on the other hand, are expected to pay between 5% and 15% dividend tax depending on the tax treaty India has with the country from which the investment is routed.
The government has reached out to some of the top revenue officials, leading mutual funds, tax advisers and lawyers to take their suggestions. Several investor associations and even some leading investors had asked the government to correct this anomaly which favored foreign investors over their Indian counterparts.
“There is a 22% difference between the tax on dividends paid by a foreign company and by an Indian developer and this has led to a situation where domestic companies are rushing to pay dividends before April. Bringing parity between tax on dividends paid by Indian companies and foreign companies is a good move and will make doing business easier, ”said Girish Vanvari, founder of Transaction Square tax consultancy.
The government removed the Dividend Distribution Tax (DDT) and made it taxable in the hands of investors. Previously, DDT was 20% company-owned, which meant it was pure cost. After the change, this would mean that a dividend recipient will have to pay tax according to their respective tax tiles; and the highest bracket results in an outflow of tax of 43%. Tax experts say the government can introduce a flat tax rate that would help local investors.
“The dividend tax rates for individuals are very high because the base tax rate is 30% and after including the surtax and tax, the effective rate is 43%. If there is a flat dividend tax rate, Indian investors could get a level playing field, ”said Rajesh H Gandhi, partner of Deloitte India.
“Even though the government has phased out DDT and made it more like TDS, many foreign companies that invest in other countries can end up paying taxes as low as 5%. high and this creates a lot of unease among investors, ”said Amit Singhania, partner, Shardul Amarchand Mangaldas.
Under tax treaties with countries like Mauritius and Singapore, the tax rate would be 15%, while for the United States and Canada, the applicable dividend tax rate would be 25%. For other countries, the tax would be 10%, but MFN status would allow additional compensation of 5%.