Dividend Tax Shift Drives 60-65% Surge in Personal Income Tax Over Four Years

By: Admin
May 28, 2024
Categories: Income Tax News|News
4 Min Read

According to a recent report, taxes paid on dividend income have been responsible for 60-65% of the surge in personal income tax over the past four years. The report attributes the strong growth in personal income tax to this dividend tax, despite the recent moderation in personal disposable income growth. Personal income taxes, which exclude corporate taxes, have increased at a compounded annual growth rate of 20% from FY21 to FY24, rising to 3.5% of GDP in FY24 from 2.5% in the pre-pandemic years. Meanwhile, growth in personal disposable income and GDP has been more modest, at less than 10%.

In her 2020-21 Budget speech, the finance minister announced the removal of the dividend distribution tax (DDT) and the adoption of a classical system of dividend taxation, wherein dividends are taxed in the hands of recipients at their applicable rates, rather than being paid by companies. This change, which took effect in FY21, shifted the tax burden from corporations to individuals, increasing the tax rate on dividends from 15% (plus surcharges and cess) to the individual taxpayer’s applicable personal income tax rate. The report suggests that these changes account for 60-65% of the increase in personal income tax post-pandemic.

In FY20, DDT accounted for Rs 50,000 crore or 0.3% of GDP under corporation taxes. The report notes that in the US, 87% of corporate equities and mutual fund shares were held by the top 20% income earners in 2023, suggesting a similar trend in India, which subjects their dividend receipts to higher tax rates since FY21. Including surcharges, the effective tax rate on dividends could be 35-40%, about double the pre-FY21 rate. The report estimates that with an effective tax rate of 36%, taxes on dividends could reach Rs 1.8-2 lakh crore in FY24, or 0.6-0.7% of GDP. This shift from corporation to personal income taxes explains 60-65% of the increase. Excluding dividend taxes, personal income tax growth aligns with nominal GDP growth, rising to 2.8% of GDP in FY24 from 2.4% in FY23.