Budget 2020: Govt abolishes DDT; experts see more participation from investors

The Finance Minister Nirmala Sitharaman in her Budget speech on February 1 announced the abolition of dividend distribution tax (DDT).

"Companies will no longer be required to pay DDT. Recipients will pay the tax at their applicable rate. A total of Rs 25,000 crore is revenue foregone due to DDT abolition," said the Finance Minister, adding that this will make India an attractive investment destination.

The abolition of DDT was among the most expected moves that the market was anticipating from the Budget 2020.

The dividend distribution tax had the multiplicity of taxes which was first levied on profits earned by the company and then on distributable profits which are further levied at source before passing onto investors.

It also attracted additional tax on dividends if the aggregate dividend income exceeds Rs 10 lakhs per annum.

Market experts and investors saw it as an area of concern and constant dismay for foreign investors which acted as an impediment to foreign fund inflow.

Experts were of the view that the DDT rate was one of the highest rates of tax on dividend distribution in the world. Besides, the non-availability of the foreign tax credit in the foreign shareholder’s jurisdiction added to their tax burden and significantly reduced the cash flow after tax available to them upon the distribution of profits.

With the decision of doing away with DDT, the government has offered significant relief to investors.

Gaurav Garg, Head of Research, CapitalVia Global Research said as the DDT has been removed, we can witness more participation from investors.

"With abolishing DDT, it will remove the double taxation for resident shareholders and will help to rationalize the effective tax rate for companies from 37.93 percent to 25.17 percent," he said.