Currently, companies are required to pay DDT on the dividend paid to shareholders at the rate of 15% plus applicable surcharge and cess in addition to the tax payable by the company on its profits.
Sitharaman said in the Budget speech that it has been argued that the system of levying DDT results in increase in tax burden for investors and especially those who are liable to pay tax less than the rate of DDT if the dividend amount is included in their income.
Further, non-availability of credit of DDT to most of the foreign investors in their home country results in reduction of rate of return on equity capital for them.
"In order to increase the attractiveness of the Indian Equity Market and to provide relief to a large class of investors, I propose to remove the DDT and adopt the classical system of dividend taxation under which the companies would not be required to pay DDT. The dividend shall be taxed only in the hands of the recipients at their applicable rate", Sitharaman announced.
"Further, in order to remove the cascading effect, I also propose to allow deduction for the dividend received by a holding company from its subsidiary", she added. The removal of DDT will lead to estimated annual revenue forgone of Rs 25,000 crore. This is another bold move which will further make India an attractive destination for investment, the Finance Minister added.
Archit Gupta, Founder, and CEO, ClearTax said, "DDT removal is good as it increases dividends received in the hands of the taxpayer - however, such receipts to now are taxable in their hands. Those above 20% tax slab - will now face more tax on their dividend income", he added.
MNCs and public sector undertakings are expected to benefit from the DDT removal as they are high dividend paying companies.
The DDT was introduced to enhance tax collections as under the dividend tax, individuals were hardly paying taxes and making disclosures on tax.
( With inputs from IANS )