Taxpayers hope budget removes 'discrimination' on dividend taxation

Resident taxpayers expect parity with non-residents on dividend taxation and they hope that the Union Budget on 1 February will address the issue.

Since 1 April 2020, dividends earned by investors from Indian or foreign companies are being taxed as per the tax slab of the individual. So, a person in the 30% tax bracket may end up paying up to 42.74% (after including cess and surcharges) on their dividend income.

Whereas non-resident investors benefit from a lower rate of 20% (plus surcharge and cess) under section 115A of the IT Act and further lower rates of 5% to 15% under the tax treaties.

Resident taxpayers will be hoping that the budget this year removes this disparity.

“The government should bring the tax rate in the hands of both types of investors at par so as to avoid apparent discrimination. Also, the rate of surcharge applicable on dividend income should be capped at 15%,” says Rakesh Nangia, chairman of Nangia Andersen India.

The Institute of Chartered Accountants in India (ICAI) in its budget proposals seeks the end the disparity in the treatment of resident and non-resident investors when it comes to taxing dividend income.

“Taxation of dividends will only benefit non-resident investors and is against the interest of the resident individual shareholders. In various countries across the world, dividend income is taxed at lower rates since the profit from which dividends are paid is already taxed at the dividend-paying company level. Due to this, there is indiscrimination with resident investors compared to non-resident investors,” says an ICAI note on its budget proposals.

It, therefore, requests the FM to keep the rate of dividend taxation in hands of resident investors at 20% (plus applicable surcharge & cess), which will be at par with the tax rate applicable for non-residents.

It is to be noted that prior to 1 April 2020, the dividend was tax-free for individuals. Instead, the companies paying dividends had to pay a dividend distribution tax of 15%. But the Budget 2020 changed the rules and relieved the companies of paying taxes on dividend payouts and made it the individual’s responsibility to pay taxes on their dividend income.

Resident taxpayers expect parity with non-residents on dividend taxation and they hope that the Union Budget on 1 February will address the issue. Since 1 April 2020, dividends earned by investors from Indian or foreign companies are being taxed as per the tax slab of the individual. So, a person in the 30% tax bracket may end up paying up to 42.74% (after including cess and surcharges) on their dividend income. Whereas non-resident investors benefit from a lower rate of 20% (plus surcharge and cess) under section 115A of the IT Act and further lower rates of 5% to 15% under the tax treaties. Resident taxpayers will be hoping that the budget this year removes this disparity. “The government should bring the tax rate in the hands of both types of investors at par so as to avoid apparent discrimination. Also, the rate of surcharge applicable on dividend income should be capped at 15%,” says Rakesh Nangia, chairman of Nangia Andersen India. The Institute of Chartered Accountants in India (ICAI) in its budget proposals seeks the end the disparity in the treatment of resident and non-resident investors when it comes to taxing dividend income. “Taxation of dividends will only benefit non-resident investors and is against the interest of the resident individual shareholders. In various countries across the world, dividend income is taxed at lower rates since the profit from which dividends are paid is already taxed at the dividend-paying company level. Due to this, there is indiscrimination with resident investors compared to non-resident investors,” says an ICAI note on its budget proposals. It, therefore, requests the FM to keep the rate of dividend taxation in hands of resident investors at 20% (plus applicable surcharge & cess), which will be at par with the tax rate applicable for non-residents. It is to be noted that prior to 1 April 2020, the dividend was tax-free for individuals. Instead, the companies paying dividends had to pay a dividend distribution tax of 15%. But the Budget 2020 changed the rules and relieved the companies of paying taxes on dividend payouts and made it the individual’s responsibility to pay taxes on their dividend income.