The finance ministry and regulators are reviewing the possibility of scrapping the dividend distribution tax (DDT) in a bid to regain investor confidence in the equity markets, said sources in the government. It is also considering rationalisation of the long-term capital gains (LTCG) taxation structure by classifying three asset classes against six at present.
The government and regulators have had a few rounds of discussion over the taxation system for share markets in the past few days, said official sources, adding that the government feels the DDT might be acting as a hindrance to the inflows of foreign investment in the country.
Dividends paid by domestic companies are subject to tax at 15 per cent. With a surcharge of 12 per cent and education cess of 3 per cent, the effective rate is 20.35 per cent.
Companies pay dividend from their profit. In the hands of investors, it is tax-free for up to Rs 10 lakh. Those who earn more than Rs 10 lakh per annum as dividend have to pay 10 per cent tax.
Ministries and government departments have cited comparative studies during meetings to increase foreign inflows into the domestic market by making tax rates in line with global peers, said sources.
A task force on direct tax legislation, too, had explained various factors around dividend distribution affecting investments and making the Indian markets quite unattractive globally. The panel had asked for the DDT to be replaced with a classical system of taxation, under which dividend receipts be declared as regular income.
The task force suggested that companies be taxed on dividend income that has not been shared with shareholders.
The DDT was introduced in the 1997 budget, and extended to debt-oriented mutual funds in the Budget for 2018-19. At present the DDT is 10 per cent; with surcharge and cess, it rises to 11.6 per cent. On debt-oriented MFs, the DDT is 25 per cent; effectively, it rises to 29 per cent with cess and surcharge.
In a bid to ease tax compliance for investors infusing money in various asset classes, the government is reworking and rationalising the LTCG tax structure. It might soon have only three broad categories: Financial equity, financial non-equity, and others (including property, gold and so on).
Financial equity will contain all kind of shares. Non-equity will have such as debt funds as bonds, debentures and so on. The third section will have remaining asset classes. “The idea is to bring uniformity across the asset classes and it should not have any differential treatment for any class of financial investors,” a source said. The task force on direct tax legislation had also recommended rationalisation of the LTCG tax in the direct tax code report submitted to the ministry in mid-August.
At present, there are six assets class and all of them have different periods of holding to classify as short term and long term that draw different tax rates. However, the government is weighing whether it is possible to have a uniform tax rates for all the asset classes. The LTCG tax was reintroduced on listed shares in 2018-19 after a gap of 14 years. It is levied at the rate of 10 per cent on the gain of more than Rs 1 lakh realised from share sales. Long term means shares sold after one year of holding.