The task force on direct tax code (DTC) has recommended abolishing dividend distribution tax (DDT) with a view to promote investment.
The dividend distribution tax is a surrogate tax and it hinders foreign direct investment inflows, sources said.
Dividends paid by a domestic company are subject to dividend distribution tax at 15 per cent of the aggregate dividend declared, distributed or paid.
The effective rate is 20.35 per cent, including a 12 per cent surcharge and a 3 per cent education cess.
According to sources, there are hardly any revenue loss by removing dividend distribution tax, since it will be offset by the taxes paid by shareholders.
The task force has also suggested providing relief to the middle class by slashing personal income tax rates.
However, sources said, the move to rationalise personal income tax will be taken by the government.
The panel also suggested strengthening compliance to shore up revenue collections, they added.
The task force on the new Direct Tax Code, which seeks to replace the existing Income Tax Act, submitted its report last month.
The government last week taking a leaf out of the report slashed corporate tax.
In the biggest reduction in 28 years, the government recently slashed corporate tax by almost 10 percentage points.
Base corporate tax for existing companies has been reduced to 22 per cent from the current 30 per cent; and for new manufacturing firms, incorporated after October 1, 2019 and starting operations before March 31, 2023, to 15 per cent from the current 25 per cent.