Budget Reforms to Boost Investment in Equity Markets

Finance Ministry in this budget proposed to abolish Dividend Distribution Tax (DDT). With the abolition of DDT, people with income up to Rs. 5 lakh will not have to pay tax on dividend income. The proposal aims to tax dividend in hand of recipients; earlier, the tax was levied on companies issuing dividends.

Mr. Hemant Sood, Managing Director, Findoc Financial Services Group shared his views on the impact of Government’s move.

Government’s decision to abolish DDT coupled with exemption of Sovereign Funds from any kind of tax for their investments in infrastructure is a big move by the government. While the reaction of Capital Markets over abolition of Dividend Distribution Tax (“DDT”) has been either muted or negative, but it apparently led to a Blood Bath on the D-Street. In the longer run, the announcement will be lead to positivity in the market.

The abolition of DDT will help more inflow from Pension funds. These funds have historically preferred infrastructure projects, but in India, the Post Tax return of this infrastructure was low due to double taxation. In their home country, they have been unable to claim any exemption under DTAA (Double Tax Avoidance Agreement), thereby reducing this asset attractiveness. Now with abolition of DDT, this dampener has been removed and existing infrastructure which is profitable will see increased flow of funds.

Abolition of Dividend Distribution Tax will also further help the existing investors in infrastructure projects to unlock value as these investors will be able to sell their existing projects to the Foreign Funds who are looking at annuity income.

Another clear winner will be Dividend schemes of Mutual Funds. Many NRIs/OCI living in USA/ UK preferred not to invest in mutual funds due to double taxation. These mutual funds will see an increase in fund flow in their dividend schemes. To conclude, this move to abolish DDT by the Hon’ble Finance Minister will indeed lead to increase in the attractiveness of Dividend-paying companies to domestic and overseas investors. This will also increase the attractiveness of REIT for foreign investors and may put the infra sector of the country back in the race.

While every budget has some losers and some winners, Budget 2020 has also seen some clear winners and interpretative disappointments. Infrastructure and foreign investors seem to be clear winners in this budget.