Non-resident investors to benefit from India's abolition of dividend distribution tax

India's 2020 Budget eliminates the dividend distribution tax that is levied on dividends issued by companies, in a move that will benefit non-resident investors in several countries with whom India has tax treaties.

Dividend income will now be taxed only in the hands of investors as per the tax rate applicable to their income, Finance Minister Nirmala Sitharaman announced in her Union Budget 2020 speech.

"Further, in order to remove the cascading effect I propose to allow deduction for the dividend received by a holding company from its subsidiary."

DDT is a tax that is applicable on income from dividend given to shareholders by a company or corporation. Currently, DDT is at 15% on the gross amount of dividend and the effective rate of DDT is 17.65%, excluding surcharge and cess. With surcharges the effective rate goes up to 20%.

This system has a drawback for foreign shareholders because they are not eligible for a tax credit. Clamour for the abolition of DDT was growing among the stakeholders and financial analysts were advocating for a cut.

The new system will benefit non-resident investors in several countries with whom India has tax treaties that set withholding tax rates between 10% and 15%, depending on the size of the shareholding. These include Australia, France, Hong Kong, Luxembourg, the Netherlands, Mauritius, Singapore, Switzerland, the UK and the US.

This will help improve the attractiveness of the Indian market, Sitharaman said. The move will result in an annual revenue forego of Rs 25,000 crore.

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