Dividend Distribution Tax is a tax levied on the dividends paid by the businesses to their shareholders. It is deducted at source which means company is responsible for deducting before distributing the dividends to the shareholders.
Dividend is a percentage of the company’s profits that are distributed to its shareholders. DDT was introduced in India in 1997, and was levied at a rate of 15% (plus applicable surcharge and cess) on the gross amount of dividend declared.
DDT was first abolished in 2002, but it was reintroduced in 2003.However, from April 1, 2020, DDT has been abolished, and dividends are now taxable in the hands of shareholders at their respective income tax rates.The burden of dividend taxation has now been shifted from corporations to individuals.
Abolition of Dividend Distribution Tax: Rationale
- It has resulted in increase in the cashflow of the companies as they have more funds to invest in their business activities.
- Earlier DDT system was considered as double taxation because companies had to pay it and shareholders have to pay income tax on the same amount. Abolition of DDT has made the taxation process more transparent.
- It has increased investor confidence in the Indian companies and has attracted more foreign investment.
- Higher dividends payout to the shareholders as the company’s cashflow increased after abolition of DDT.
- It boosts the Ease of Doing Business index in the country.
DDT will no longer be used, which will increase foreign investment and make India a more desirable location for businesses. Similar tax structures exist in nations like China, Japan, and the US, although they do not use DDT.
