The Impact on Shareholder‘s Wealth due to Abolishment of Dividend Distribution Tax

Abstract

As per Section 115O of the Income Tax Act 1961, Dividend Distribution Tax (DDT) is imposed on dividends distributed by companies to their shareholders, and it was paid by the company. However, on 1st February 2020, in the India Union Budget 2020, it was announced to abolish the Dividend Distribution Tax (DDT). Dividend policy is a strategy used by a company to determine the amount and timing of dividend payments. The dividend policy framed by an organization is one of the crucial issues in corporate finance as it may impact shareholders’ wealth. This study aims to analyze the impact of shareholders’ wealth due to the abolishment of the Dividend Distribution Tax. Under the new policy, dividends are taxed and are considered part of the shareholder’s income. In the DDT arrangement, tax was deducted by the company on the dividends given to the shareholders at a constant rate. However, due to this new policy, small investors and retirees may receive lower dividend amounts, which results in them paying taxes. The problem has been analyzed by finding the relationship between dividend policy and shareholders' wealth. The study is based on data for the period of 6 years from the financial year 2013-2014 to 2018-2019 of 50 companies of the Nifty 50. Statistical analysis has been conducted considering variables such as earnings per share and dividend per share.