Mumbai: Finance minister Arun Jaitley’s announcement on Monday of an additional dividend tax disappointed market participants, who fear it will result in higher taxation for wealthy individuals and discourage them from investing.

In his budget speech, the finance minister said that apart from the corporate dividend distribution tax (DDT), high networth individuals (HNIs), Hindu undivided families (HUFs), and firms with a dividend income of more than 10 lakh will be charged additional tax at the rate of 10%.

Jaitley pointed that DDT uniformly applies to all investors irrespective of their income slabs.

“This is perceived to distort the fairness and progressive nature of taxes. Persons with relatively higher income can bear a higher tax cost," Jaitley said in his budget speech.

In an immediate reaction to this development, apart from other announcements, BSE’s Sensex fell as much as 2.85%, or 659.69 points, to 22,494.61.

“This was unexpected," said P. Phani Sekhar, fund manager—portfolio management services at Karvy Stock Broking Pvt. Ltd.

“Investors were caught off-guard. There was speculation that the LTCG (long-term capital gains) holding period would go up. However, this has come as a double-whammy for HNIs," said Sekhar.

However, there was no immediate clarity on whether the tax will be for the entire dividend income or for only the dividend income that exceeds 10 lakh.

“Some of steps related to DDT are negative, which is hurting the market," said Deven Choksey, group managing director, KR Choksey Investment Managers Pvt. Ltd.

Tax experts agreed.

“No change in capital gains tax regime for listed stocks a positive for the stock exchange, however an additional tax of 10% on dividends in excess of 10 lakh and increase in STT (securities transaction tax) on options was a dampener for the markets," said Girish Vanvari, national head of tax at KPMG in India.

The market staged a quick recovery in volatile trading, as it awaited further clarity.

The Sensex closed at 23,002 points, down 0.66% as the market digested budget developments.

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