As the Budget is around the corner, reports suggest that the dividend distribution tax could be abolished. The task force on the direct tax code has also recommended scrapping dividend distribution tax (DDT) in order to boost investments.
What is DDT?
A dividend is a sum of money given by a company to its shareholders out of the profits earned. Dividend distribution tax is the tax levied on the dividend paid by a company to its shareholders. The provisions of DDT were introduced by the Finance Act 1997. Only a domestic company is liable and has to pay the tax even if it is not liable to pay any tax on its income.
How does its abolition help the economy?
After the government announced a cut in corporate tax rate, there were many who called for removal of Dividend Distribution Tax (DDT). If the government abolishes the DDT, it will boost market sentiment and allow companies to invest more in the economy. The move will make the Indian equities more attractive for foreign investors and will also increase Foreign Direct Investment (FDI).
Is it applicable to Mutual Funds?
DDT is applicable on mutual funds as well. The dividends from the mutual fund schemes are free of tax for the shareholders as the fund house deducts DDT at the source. It reduces the amount present for the investors. For Debt oriented funds-- DDT is at the rate of 25 per cent for individuals and 30 per cent for corporates. For equity-oriented mutual funds-- DDT is at the rate of 10 per cent (11.648 per cent including surcharge and cess).
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