New Delhi: Mumbai: Finance Minister Nirmala Sitharaman on Friday, while addressing the industry bodies in Mumbai, said that Dividend Distribution Tax (DDT) is aimed at giving more money in the hands of small shareholders. While she admitted promoters and High Networth Individuals (HNIs) will face a higher taxation, vast majority of small shareholders will benefit, indicating government’s reluctance to modify the budget provisions.
On the personal income tax front, the government estimates that 69% taxpayers are likely to benefit from the new tax regime and 11% would remain tax neutral.
In the budget the government had given into the long-time industry demand and abolished DDT. Instead of companies paying it out, now it will be taxed at the hands of shareholders at the marginal rates.
The taxation at marginal rates has left the promoters and HNIs a worried lot. They could face a taxation of as high as 43% when their dividend income is considered. Some investors during the interaction with finance minister claimed that this is too high and also puts then at a disadvantage as compared to multi-national companies as their shareholders would taxed at rates prescribed in tax treaties. The foreign shareholders will also be able to claim tax credit in their home jurisdiction putting them on advantageous ground as compared to domestic shareholders.
“If you look at taxation now for taxpayers whose applicable rate is below 15% or 20%, the abolition of DDT is conducive. For promoters and HNIs, it wasn’t suitable earlier and it is worse now. But you are thinking of one section while we want to put hands in the money of the other section. We want to give money in the hands of the small retail shareholders; let them decide what they want to do with it,” said Nirmala Sitharaman.
“We are coming up with steps to simplify the tax regime. We have shown our intent to move towards a simplified tax regime and corporate tax simplification and reduction is a move towards that. The taxpayer charter (as announced in the Budget) is based on trust that should be there between the taxation regime and taxpayers,” she said at a media conference in Mumbai on Budget 2020-21 after interactions with industry, academia and policy makers.
Anticipating a huge tax payout for promoters, many companies have already moved to announce interim dividends. Some of them have announced board meeting to consider interim dividends.
Some of the companies include REC International, ACC, Hero MotoCorp, REC Ltd, Alkem Lab, Sun Pharmaceuticals Industries Ltd, Indiabulls Housing Finance.
“A very small proportion of taxpayers will have such high dividend income to push them to the highest tax bracket. For small shareholders this is a better regime as they will continue to be taxed at marginal tax rates. We already are seeing many companies moving to pay out dividends but I do not believe this will sustain as many companies highest revenues are in the last quarter so a dividend payout is unlikely,” said Deepak Shenoy, founder and CEO, Capital Mind.
The government also clarified that based on income tax returns of 2018-19 it ran simulation which showed that majority of tax payers would benefit due under the new tax regime.
In the budget the government announced a dual taxation regime – one with lower tax rates and no exemptions and second with current tax rates and exemptions. This led to speculations that the new tax regime was not as beneficial as prevailing regime.
Revenue Secretary Ajay Bhushan Pandey said the government did an analysis of 5.78 crore taxpayers before the budget and found that 69% of them would save on tax payouts under the new system, while 11% were found to be favouring the old regime.
“We feel at least 80% of the people will come to the new scheme,” Pandey added.
On the issue that lack of taxation benefits will disincentivise investments Sitharaman said she wants to leave it on tax payers on what to do with the money and that we are underestimating them.
“Our discussions show that this is the old-fashioned way of directing investments (through tax breaks) and is limiting options to the tax payers. If he wants to spend his money in this economy, it is welcome. If wants to save where he wants to, that’s welcome. We wanted to address this and this is where we went,” said Sitharaman.
On the industry demand of removing Long Term Capital Gains (LTCG) on trading she said that she did not have enough time to assess the revenue generation.
We would like to wait for one full year to assess the impact of LTCG before we can take a considered call, said Sitharaman.