What does it mean when the government says it will remove dividend distribution tax? Will the DDT be totally scrapped?

The dividend distribution tax (DDT) has been in existence for a very long time. What happens in DDT is that the government asks the company to deduct the tax and then pay the dividend. Currently, the rate of DDT on dividends is 15% but if you add up surcharge and cess it gets closer to 20%. For the company, this expense does not give then any tax shield; also the DDT reduces the total dividend in the hands of the investor. However, you must remember that the DDT generates close to Rs.60,000 crore for the government and they would not lose that kind of revenue.

As a result, the onus of dividend is likely to shift to the investor. Like in the old days prior to 2000, dividends will be taxed in the hands of the investor as other income. The dividend tax regressively hits all the investors; small land large. Currently, in addition to DDT, investors earning more than Rs.1 million as dividends per year have to pay 10% tax on the excess. Now, the government may look to just tax it like other income so that it becomes progressively taxed like in the case of your regular income. That will reduce the burden on the company and induce them to declare more dividends.