Budget 2020 is coming and if the government removes Dividend Distribution Tax (DDT), how will it benefit companies and shareholders? To understand this, Zee Media Correspondent Brijesh Kumar has spoken to well-known tax expert TP Ostwal.

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Notably, if the Dividend Distribution Tax is removed then government revenues will come down. That may not be acceptable to the government. If the government has to earn revenues than it has to tax the dividend that goes into the hands of the shareholders.

And if the dividend is taxed in the hands of the shareholders, then companies will have to impose Tax Deducted at Source (TDS). So, when a company gives dividends to its shareholders, it will have to cut TDS from it. If the company cuts 20% TDS, then the situation will become revenue neutral for the government.

When dividend will be given to the shareholders, that will fall into the tax net under different income slabs. Now, the question arises as to how much will the government tax that dividend. If it maintains the same rate then the overall tax will come to 30%. So, it will have to come under income slabs. For marginal or small shareholders, this tax may not apply and they will get a refund. 

This was our classical system before 1988. There are many countries in the world which have the same system. Marginal shareholders with dividend income up to Rs 10 lakh may not have to pay any tax. But large shareholders may have to pay 30% tax out of which 20% will be TDS while the 10% is still being paid by the shareholders on dividend over Rs 10 lakh.

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The major advantage of this will be that for the foreign shareholders, though the government will cut taxes, that taxation my be as per the treaty (with a particular country). Mostly the tax on dividends for foreign shareholders as per the treaty is between 10-15%. It is not 20%.