According to the report, the dividend tax explains the strong growth in personal income tax even as personal disposable income growth has moderated in recent years.
Income taxes paid by entities other than corporations (personal income taxes) have increased at a compounded rate of 20% during FY21-24.They have grown to 3.5% of GDP in FY24, up from 2.5% in the pre-pandemic years. Personal disposable income (and GDP) growth, meanwhile, has been more modest at less than 10%.
In her 2020-21 Budget speech, the finance minister had said, “…to remove the dividend distribution tax and adopt the classical system of dividend taxation under which companies would not be required to pay DDT. The dividend shall be taxed only in the hands of the recipients at their applicable rate…”
This means that DDT ended in its erstwhile form in FY21, and was shifted from corporation taxes into personal income taxes. “With such a shift, the tax rate on dividends was also changed from 15% (plus surcharges and cess) to the personal income tax applicable to the individual taxpayer. These two related changes – to our mind – explain about 60-65% of the surge in PIT in the post-pandemic years,” the report said.
In FY20, DDT under corporation taxes was Rs 50,000 crore or 0.3% of GDP. “In the US, 87% of corporate equities and mutual fund shares were held by the top 20% income earners in 2023. A similar trend is likely in India, subjecting their dividend receipts to a higher tax rate since FY21. Including surcharges, the effective tax rate on dividends could be 35-40%, double the rate before FY21,” the report added.
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 taxes to personal income taxes would explain 60-65% increase. Excluding dividend taxes, PIT growth aligns with nominal GDP growth, rising to 2.8% of GDP in FY24 from 2.4% in FY23.