Finance ministry makes a budget case for small investors

Finance minister Nirmala Sitharaman justified the change in DDT rules  saying  a vast  majority of small shareholders will benefit from it (Photo: PTI)

Mumbai: Finance minister Nirmala Sitharaman told Indian industry on Friday that proposed changes in dividend distribution tax (DDT) rules were aimed at putting more money in the hands of small shareholders, declaring, “let them decide what they want to do with it”.

While admitting that promoters and high net-worth individuals (HNIs) will face a higher tax rate, she justified the move on the grounds that the vast majority of small shareholders will benefit from it. The remarks, made in an address to industry bodies, indicated that the government would be reluctant to modify the proposal.

On the personal income tax front, the government estimates that 69% of taxpayers are likely to benefit from the new tax regime, while for 11% it would remain tax-neutral.

In the budget presented on 1 February, Sitharaman, in deference to a long-held industry demand, proposed that instead of companies paying DDT, it will now be taxed at the hands of shareholders at marginal rates.

This has left promoters and HNIs a worried lot, with fears that they could face a tax rate as high as 43% when their dividend income is taken into account.

During Friday’s interaction, some investors complained that the projected tax rate was too high, and it puts them at a disadvantage when compared with multinational companies as their shareholders would be taxed at rates prescribed in tax treaties. Foreign shareholders will also be able to claim tax credit in their home jurisdiction, putting them at an advantage over domestic shareholders.

In response, Sitharaman reasoned: “If you look at taxation now for taxpayers whose applicable rate is below 15% or 20%, the abolition of DDT is conducive. For promoters and HNIs, it wasn’t suitable earlier and it is worse now. But you are thinking of one section, while we want to put money in the hands of the other section. We want to give money in the hands of the small retail shareholders—let them decide what they want to do with it.”

Anticipating a huge tax payout for promoters, many companies have already announced interim dividends (Graphic: Sarvesh Kumar Sharma/Mint)
Anticipating a huge tax payout for promoters, many companies have already announced interim dividends (Graphic: Sarvesh Kumar Sharma/Mint)

Anticipating a huge tax payout for promoters, many companies have already announced interim dividends, while some others have called board meetings to consider paying out interim dividends before the fiscal-end.

The companies include KEC International, ACC Ltd, Hero MotoCorp Ltd, REC Ltd, Alkem Laboratories Ltd, Sun Pharmaceutical Industries Ltd and Indiabulls Housing Finance Ltd.

“A very small proportion of tax payers will have such high dividend income to push them to the highest tax bracket. For small shareholders this is a better regime as they will continue to be taxed at marginal tax rates. We already are seeing many companies moving to pay out dividends, but I do not believe this will sustain as many companies’ highest revenue are in the last quarter, so a dividend payout is unlikely,” said Deepak Shenoy, founder and chief executive officer, Capital Mind, an investment research and wealth management firm.

The government also clarified that based on the income tax returns of 2018-19, it ran a simulation, which showed that the majority of taxpayers would benefit from the new regime.

The budget proposes a dual taxation regime—one with lower tax rates and no exemptions, and the other at existing tax rates with exemptions. This led to speculation that the new tax regime is not as beneficial as the prevailing one.

Revenue secretary Ajay Bhushan Pandey said the government did an analysis of 57.8 million taxpayers before the budget and found that 69% would save on tax payouts under the new system, while for 11% it was found to be tax neutral. “We feel at least 80% of the people will come to the new scheme,” Pandey added.

Over concerns that the lack of tax benefits will disincentivize investments, Sitharaman said she wants to leave it to taxpayers on what they would like to do with the money.

“Our discussions show that this is the old-fashioned way of directing investments (through tax breaks), and is limiting options to the taxpayer. If he wants to spend his money in this economy, it is welcome. If he wants to save where he wants to, that’s welcome. We wanted to address this, and this is where we went.”

On the industry’s demand for removing long-term capital gains (LTCG) tax on trading, she said there was not enough time to assess the revenue generation (what kind of revenue such a step would generate). “We would like to wait for one full year to assess the impact of LTCG before we can take a considered call,” said Sitharaman.