Abolishing Dividend Distribution Tax (DDT) is a bad idea

Private sector has not announced any major investment after recent corporate tax cut and therefore abolishing DDT at this point of time may prove to be counter effective.

Written by December 2, 2019 15:14

— By Shshank Saurav (Chartered Accountant)

Finance Minister Nirmala Sitharaman announced major tax cut for corporate in last September for which estimated revenue loss was Rs. 1.45 trillion. Data released by CBDT based on tax collection till September 2019 (after second instalment due date for advance tax) shows that income tax receipts has increased by merely 4.7 percent as against 17.5 percent projected in budget. This is a worrying situation because it doesn’t include the impact of tax cuts which were announced after due date for paying second instalment of advance tax. There is similar trend in indirect tax collection where tax mobilisation has slowed down due to decline in consumption. Government is struggling to meet the fiscal deficit targets amid growth slowdown and it cannot expect tax buoyancy in the coming period to improve the situation.

Nirmala sitharaman

Government has already started the budget preparation process and people are giving their inputs to concerned officials. Indian corporates are demanding to abolish dividend distribution tax (DDT or CDT) on the pretext of double taxation. DDT is paid by a domestic company which declares dividend. It is necessary to understand the mechanism of taxation and rationale behind imposing DDT before concluding it as double taxation for the taxpayer. As per the estimates DDT contributes approximately 8 percent of the overall corporate tax collection.

copr tax

Section 115O of the Income Tax Act, 1961 (“Act”) which casts an obligation on the companies to pay DDT has been amended over the period and the provisions have been made beneficial to assesses. Initially when DDT was introduced in 1997 budget then section 10(34) [section 10(33) at that time] was also inserted in the Act which provided that dividend received by any person shall be exempted from taxation. In other way DDT acted as a mechanism to ensure that due taxes are collected at source stage itself notwithstanding the tax status of the person receiving such dividend. Taxability of dividend has been changed over time and in 2008 budget government allowed domestic companies to offset the amount of dividend received from its subsidiaries while computing DDT liability. 2016 budget took away some of the benefits enjoyed by taxpayers and section 10(34) of the Act was amended and a new section 115BBDA was inserted. From 2016 onwards dividend income over Rs. ten lakhs is taxable at the rate of ten percent. Few years back government introduced tax on buyback of securities also when companies started taking share buyback route to avoid DDT.

Dividend distribution tax

It is important to discuss the rationale behind implementation of DDT and its relevance in current scenario. DDT was introduced with an aim to plough back the profit for investment and expansion. Gross fixed capital formation (GFCF) as percentage of GDP has declined from 34.1 percent in 2011-12 to approximately 29 percent in 2017-18. There is a steep decline in gross capital formation (GCF) ratio also. Private sector has not announced any major investment after recent corporate tax cut and therefore abolishing DDT at this point of time may prove to be counter effective. Up to a certain extent, DDT restrains companies from distributing the retained surplus by way of taxation at the level of company itself and undistributed profit is used by the companies for expansion purpose. Abolishing DDT will not only impact the tax collection but it will also affect the investment cycle and therefore it makes no economic sense to make any such move in the current scenario.

So far as argument of double taxation is concerned, it must be appreciated that dividend income in the hands of small taxpayers is exempted from tax. Dividend income over Rs. 10 lakh in a year is taxed at a concessional rate of 10 percent. From a perspective it may be argued that retained surplus belongs to shareholders of the company and for all practical purposes DDT is in the nature of tax on shareholder’s income which is withheld at source by the payer. Element of double taxation has been taken care by allowing offset of dividend received from a subsidiary while determining DDT liability of parent entity. If there is a double taxation in the entire chain then it is on the person (other than company, charitable trust etc.) who is receiving dividend over Rs. 10 lakh in a year. DDT ensures that a shareholder having large stake in the company doesn’t go untaxed and the monetary threshold of ten lakh rupees covers only those individuals who have large portfolios.

Corporate sector

Government has already provided major relief to corporate by reducing the tax rates and now it is time for industry to respond positively and revive the investment cycle. Usually public expenditure is increased in case of economic slowdown and therefore asking for another relief is unjustified given the fact that industry is yet to respond positively on the concessions which were given few months back.

{{The writer is Chartered Accountant by profession with distinguished academic career including All India 34th rank in CA Final. He holds specialisation in International Financial Reporting Standards (IFRS), Anti-Money laundering (AML) and Foreign Exchange & Treasury Management (FXTM).}}