Industry body CII has also sought rationalisation of the dividend distribution tax rate.
The finance ministry may consider doing away with the dividend distribution tax (DDT) in Budget 2018 to be unveiled on February 1, EY India said. In its pre-Budget expectations, EY said dividend distribution tax has become burdensome for corporates due to various factors such as high rate, litigation on disallowance and hence the return on capital employed has significantly diminished.
"Corporate income tax rate reduction does not seem likely in light of the fiscal constraints and subdued GST collection. However, government may rationalise the effective corporate tax rate by abolishing dividend distribution tax and restoring the classical system of taxation of dividends in the hands of shareholders," said EY India Partner & National Leader, Business Tax Services, Garima Pande.
In Budget 2015-16, Finance Minister Arun Jaitley had said that the basic rate of corporate tax in India at 30 per cent is higher than the rates prevalent in other major Asian economies, making domestic industry uncompetitive, and it would be brought down to 25 per cent over four years.
Industry body CII has also sought rationalisation of the dividend distribution tax rate to 10 per cent in the upcoming Budget to encourage participation of different stakeholders in the country's financial markets.
Dividends paid by a domestic company to shareholders are subjected to dividend distribution tax at 15 per cent of the aggregate dividend declared. The effective rate is 20.35 per cent, including surcharge and cess. The dividend income is tax-free in the hands of investors. However, if the amount of dividend income exceeds Rs 10 lakh on a gross basis, an additional tax of 10 per cent (plus surcharge and cess) applies on dividend income. (With PTI Inputs)