Budget 2018 had proposed to tax Long-Term Capital Gains (LTCG) on the sale of listed securities if the same exceeded Rs.1 lakh. Under the Direct Tax Code, a panel set up to submit recommendations to the Finance Minister has recommended abolishing the Dividend Distribution Tax (DDT), while taxing the same in the hands of the taxpayers as LTCG, as was proposed last year.
The purpose of abolishing DDT is to remove the cascading effect of taxes, which is now being taxed thrice, in the form of a corporate tax, DDT and finally at the investor level. It also became a burden for foreign investors, who bore this DDT but could not claim the benefit of the same while paying taxes in their home country.
This is due to the fact that this income from the listed securities does not get taxed in their own hands, thus preventing them from claiming Foreign Tax Credit (FTC) in their home country. If the DDT gets replaced with a withholding tax, then they will be able to claim the same as foreign tax credit.
The current rate of DDT in India is around 20.56%, inclusive of surcharge and cess. However, until now, this income is tax-free in the hands of foreign shareholders, as well as Indian shareholders, except for income received in excess of Rs.10 lakh.
Hence, considering the high rate of DDT, it will be beneficial to taxpayers if this income were to be taxed in their own hands only. In addition, the withholding tax rate will be a far lower rate as well, and this would mean lower sunk costs for investors.
This abolition also aims to favour neutrality amongst different classes of investors, and since the Securities Transaction Tax (STT) will still be retained, tracking of transactions can still be carried out even if the DDT gets abolished. The panel is also recommending an overview in the overall tax slabs in India, pushing for lower tax rates, especially in the personal income tax slabs categories.
The implementation of these measures should hope to increase foreign investment, investor confidence, and tax compliance.