Dividend income fuels surge in personal income tax: Motilal Oswal report

economictimes.indiatimes.com:

Motilal Oswal has highlighted that taxes on dividend income have significantly contributed to the surge in personal income tax (PIT) over the past four years. According to the report, this shift accounts for 60-65% of the growth in PIT, despite a moderation in personal disposable income growth, reported TOI.

The report indicates that the growth in PIT has been robust, increasing at a compounded rate of 20% during FY21-24. By FY24, PIT reached 3.5% of GDP, up from 2.5% in the pre-pandemic period. In contrast, personal disposable income and GDP have grown at a more modest rate of less than 10%.

The surge in PIT can be traced back to the 2020-21 Budget announcement by the finance minister, which abolished the Dividend Distribution Tax (DDT) and introduced the classical system of dividend taxation. Under the new system, companies no longer pay DDT; instead, dividends are taxed in the hands of the recipients at their applicable personal income tax rates.

This policy change shifted the tax burden from corporations to individual taxpayers, significantly impacting the PIT landscape. Previously, DDT was taxed at a rate of 15% (plus surcharges and cess). With the shift, dividends are now subject to the recipient's personal income tax rate, which can be substantially higher.

In FY20, DDT under corporation taxes amounted to Rs 50,000 crore or 0.3% of GDP. The report points out that in the United States, 87% of corporate equities and mutual fund shares were held by the top 20% of income earners in 2023. A similar trend is