The proposed framework of levying tax on dividends in the hands of the investors has put Indian promoters and high networth individuals (HNIs) at a loss, market participants feel, even as the government believes that the new taxation policy will put more money in the hands of investors.

Addressing a gathering from the industry, Finance Minister Nirmala Sitharaman said the proposed framework would be beneficial for investors, especially retail investors, who will have more money to invest. In the Union Budget announced last week, the FM proposed abolishing dividend distribution tax (DDT) on companies and taxing dividends in the hands of the investors at the applicable slab rates.

Market participants, however, expressed their concerns before the Finance Minister and said that the framework could affect both big investors and promoters.

Motilal Oswal said that the proposed framework undoubtedly benefits the small investor, but puts Indian promoters and high networth individuals at a loss, compared to foreign investors. The former category would end up paying more than 50% as tax, while for foreign investors it would be very less, he said while apprising the Finance Minister.

Veteran Hemendra Kothari of DSP Investment Managers said the proposed DDT framework could lead to companies going slow on dividend announcements. Mr. Oswal said that firms could start looking at buybacks rather than announcing dividends.

Incidentally, foreign investors are governed by tax treaties and would typically pay significantly less tax than the Indian promoters.

Revenue Secretary A.B. Pandey, however, said that while foreign investors were governed by treaties, that was not the final tax rate that they paid.

“Many foreign portfolio investors (FPIs) who come from countries with whom we do not have a treaty, pay the applicable tax rates in their country,” said Mr. Pandey.