The Budget 2020 proposed for the abolition of Dividend Distribution Tax (DDT) in the hands of companies, but it still gets taxed in the hands of recipients or unitholders.
The companies which give out rich dividends to consumers stand to benefit the most. These are mostly MNCs, or multinational corporation, suggest experts.
An MNC is a company that has assets in at least more than one country other than the home country.
The Dividend Distribution Tax which was 15 percent (effectively 20.36%) has been removed by the FM in the Budget 2020-21 and MNCs stand to benefit the most. The reduction in corporate tax last year also helped in boosting the bottomline.
MNCs having subsidiaries in India pay two types of taxes in India: corporate tax and DDT. Last year FM cut the corporate tax rate to 25 percent without exemptions.
Hence, the total tax levied on MNCs is corporate tax at a maximum of 25 percent and DDT at the rate of 20.56 percent (DDT at 15%, plus surcharge and cess) is about 45 percent, suggest experts.
“However, while these foreign shareholders could claim credit for corporate tax paid in India in their home countries, that was not the case with DDT paid by their Indian businesses,” Atish Matlawala, Sr Analyst, SSJ Finance & Securities told Moneycontrol.
“Now, with DDT gone, these investors will be able to claim credit for all tax paid in India in their home jurisdictions. This we believe will make India a lucrative investment destination, and MNC’s will continue to outperform their India peers going ahead,” he said,
The removal of DDT is going to delight the FIIs as those companies that are known for distributing hefty dividends to their particular investors are going to attract investment from global markets.
Stocks hitting 52-week highs:
Most of the MNC companies started hitting fresh 52-week highs in the run-up to the Budget 2020, and post the event. Experts feel that the momentum in some of the stocks is unlikely to go down.Stocks that have been hitting fresh 52-week highs include Honeywell Automation, Nestle India, as well as Bata India.
There are as many as 10 MNC stocks that outperformed Nifty in 2019 that include names like SKF India, Honeywell Automation, Siemens, Bata India, Whirlpool, and Abbott India.
“Majority of the MNC companies hitting fresh 52 week highs are big beneficiaries of structural changes such as the formalisation of economy, movement of business to large corporates and increasing focus on better corporate governance apart from having cash flow positive businesses and high dividend payouts,” Sameer Kaul, MD & CEO, TrustPlutus told Moneycontrol.
“This premium is likely to continue till Indian corporates adjust to the structural changes in the economy,” he said.
India has always been an attractive market for foreign companies to sell their products because of favourable demographics consisting of young population with aspirations. In times of volatility, defensive stocks like MNC companies are preferred play by investors.
“MNCs are always known for their prudent corporate social responsibility and possess the confidence of the risk-averse investors in order to safeguard them against the inflation and systematic risks so a continuation of investing in those stocks cannot be ruled out,” Kuldeep Tomar, Director, Advisorymandi.com told Moneycontrol.
“Most of the MNCs are running at their 52-week highs and their momentum is not going to deviate in a substantial period of time,” he said.