What are the recommendations made by the task force on direct tax code on dividend distribution tax?

The new Direct Tax Code seeks to replace the existing Income Tax Act. The task force on direct tax code (DTC) has recommended abolishing of dividend distribution tax (DDT) with a view to promote investment.

What is dividend distribution tax?

• A dividend is a return given by a company to its shareholders out of the profits earned.
• The tax which the companies are required to pay when it distributes these profits amongst its shareholders is known as Dividend Distribution Tax (DDT).
• The DDT is deducted at source and only the net dividend (after deducting tax) is paid to investors.
• DDT is not included in the income tax liability of a company. It is calculated and paid over and above the income tax.
• There exists a concessional rate of tax of 15% on dividend received by a domestic company from its foreign-based subsidiary.

DDT is criticized as a surrogate tax hindering foreign direct investment inflows. In India dividends are subject to dividend distribution tax at 15 per cent of the aggregate dividend declared, distributed or paid. The effective tax rate after including 12 per cent surcharge and a 3 per cent education cess comes around to 20.35 per cent.

The income realized from DDT is pretty small and there would be hardly any revenue loss because it will be offset by the taxes paid by shareholders.