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Budget 2018: Dividends may become taxable in your hands but LTCG tax on equity unlikely, says EY : 12-01-2018


Dividends may be made taxable in the hands of the receivers instead of being taxed at source via Dividend Distribution Tax (DDT), says Sonu Iyer, Tax partner and people advisory services leader, EY. On the other hand, she did not feel that long term capital gains tax would be reintroduced for equity because “markets are doing well and the government would not want to stop the market momentum”. While there is a lot of talk that LTCG tax would yield huge tax revenue, however the government already  gets tax in the form of STT which is much easier to collect, she reasoned.

During pre-budget discussion with ET online, she said that a dividend tax on those receiving dividend of over Rs 10 lakh per annum has already been introduced earlier. Therefore, it is likely that this line of thinking may be extended to all dividend receipts to make the tax on dividends more equitable and also to reduce the total load of tax on companies. Currently, if corporate tax and DDT are counted together then the effective tax on companies is around 46% which is much higher than in  other countries, she said. This would also help improve the ease of doing business in India which is a stated objective of the government, she said.

Such a move would also be pro-small investor, she added. Dividend was taxable in the hands of the recipient prior to 1997 when it was abolished and DDT was introduced. If this regime is brought back then, investors would pay tax on the dividend on the basis of their income level instead of everyone having to pay a flat DDT at the same rate which is levied at source i.e. before distribution.

Currently, companies pay dividend distribution tax (DDT) when they pay dividend and such dividend is exempt in the hands of the recipient shareholders. In the Union Budget 2016, the government introduced a new section 115BBDA to tax the dividends in the hands of the shareholders, in excess of Rs 10 lakh, at a flat rate of 10%. It is anticipated the government may change the current method of dividend taxation and make dividend taxable only in the hands of the shareholders, she said.

There has been talk that the government may either raise the holding period for long term capital gain tax exemption (on listed equity shares) to 2 years from the current holding period of one year or levy tax on the long-term capital gains from listed equity shares. Introduction of an LTCG tax would hit market sentiment, Iyer said.

Source : Economic Times