Impact of dividend distribution tax removal on share prices and dividends for various classes of ownership

Abstract

Since the 1960s, dividends are taxed twice, first in the form of corporate profits, and then the announced dividends are taxed. However, the way it has been taxed is changing. Until the financial year 1997-98, dividends were taxed at the hand of the investor. In the financial year 1997-98, dividend distribution tax (DDT) was introduced. After this point, dividends were taxed at the corporates' hand before it was handed over to the investors, and the dividend income was exempted from the taxable income for the investors. This resulted in double taxation for dividend-paying companies. For the financial year 2020-21, and after that, the dividend distribution tax has been scrapped, and the dividend income will be taxed at the hands of the investors at their individual tax rate. This will have different effects on the shareholders, depending on their existing tax structure. For instance, promoters and HNIs who receive significant dividend incomes will be badly affected due to their higher tax slabs. Foreign promoters will be benefitted as they can now claim tax credit from their home countries.