In what could come in as a big relief for capital market players, the task force on direct tax code has recommended abolishing the dividend distribution tax while retaining the longterm capital gains tax and securities transaction tax, a source in the know of the matter said. 

The panel, which submitted its report to financeNSE -0.66 % minister Nirmala Sitharaman last week, has also suggested reworking the personal income tax structure with lower rates in a bid to make India a more tax-compliant country. “The idea behind removal of DDT is to remove the cascading impact of taxation and the panel favours no preferential treatment for any class of investor,” said the source. 

Dividends paid by a domestic company are subject to dividend distribution tax at 15% of the aggregate dividend declared, distributed or paid. 

The DDT payable is required to be grossed up. The effective rate is 20.3576%, including a 12% surcharge and a 3% education cess. 

Market participants in a meeting with Sitharaman two weeks ago had highlighted that dividends were taxed thrice in the form of corporate tax, dividend distribution tax and finally at the investor level, making the Indian capital market quite unattractive globally. 

The panel favours removal of DDT and replacing it with a classical system of taxation under which dividend receipts be declared as normal income. The task force while suggesting changes to Section 115 (o) of the Income Tax Act has recommended that companies be taxed on dividend income that has not been shared with shareholders. 

It is levied at 0.1% of turnover for delivery-based equity transactions. For intra-day transactions, the STT for purchase is nil and for sale is 0.025% of the turnover. 

The panel has also suggested ideas for rationalising the personal income tax slabs. Sources said it has recommended tax brackets of 5%, 10% and 20%, against the prevailing structure of 5%, 20% and 30%. “There could be a temporary blip due to revision of tax slabs. The government will have to take a view on it. It will impact the government coffers for 2-3 years but ease in filing, simplicity in taxation, minimising exemptions and a mediation panel for dispute resolution will help in boosting tax .. 

Source : Financial Express