Experts for slashing dividend tax

Experts for slashing dividend tax
ENS ECONOMIC BUREAU

MUMBAI/KOLKATA, JAN 13: Leading capital market experts have suggested bringing down dividend tax to at least its earlier level of 10 per cent, if not removed completely, to revive the capital market. "The capital market index was doing extremely well till the last Union Budget was presented and only one factor -- increasing dividend tax to 20 per cent from 10 per cent changed the entire scenario," J M Morgan Stanley chairman-cum-managing director Nimesh Kampani said.

The Parthasarathi Shome committee's interim report on tax policy has recommended a complete abolition of the dividend distribution tax, which the government surprisingly hiked from 10 to 20 per cent in the last budget. "This one step has the potential to provide the much-needed kickstarter effect to trigger an upturn in sentiment not only in the stock markets but also in the economy as a whole. By taxing companies first and then slapping a tax on dividends paid out by them as well, the government has been going along a strange path of double taxation, which virtually penalised corporates for sharing their income with the shareholders," said a fund manager.

Kampani said dividend tax was an essential factor where the government has to play a role by bringing it back to its earlier level of 10 per cent. Speaking at a workshop on Capital Market: Revival and Strategy for Growth organised by Indian Chamber of Commerce in Calcutta, he said the government should also bring in legislations to avoid double and sometimes even treble taxation on dividends, he said. If a subsidiary of a company like ICICI Ltd recommended dividend as per existing rules, it would have to pay a tax and once again when the parent company planned to pay dividend.

Kampani said if these anomalies of double taxation were not removed, corporates would soon evolve new ways to avoid tax on dividend and cited some ways of how it could be done. Kampani said if the tax related problems for dividend are not sorted out the government's revenue would come down instead of increasing.

Corporates instead of paying dividend might go in for buy-back to the extent it was planning to pay the same to avoid taxation and might also announce bonus issue instead of dividend, he said.

In fact, even earlier, corporates were skeptical of the imposition of section 115(O) that made domestic companies liable to pay a tax of 10 per cent on dividends declared or distributed by them. The government, for inexplicable reasons, further modified the provision of this section to increase the rate to 20 per cent. As if this disincentive was not enough, the companies were also expected to pay a surcharge of 10 per cent. Predictably, the much-feared adverse impact has seeped through with companies contemplating cutting dividends, thus affecting incomes in the hands of shareholders. Even before the hike, the aversion to distributing dividends among corporates was evident.

Kampani also suggested ammendments of concerned IT Acts to prevent double taxation, reduce capital gains tax to six month period and change the takeover code to suite companies entering into share swap. He said certain ammendments were required in the takeover code, especially for those companies offering share swap, as investors and corporates were `unnecessarily forced to pay tax.

Under the IT Act, whenever there was exchange of shares it was taxable even though investors were offered shares of another company in replacement to the one which they held. "It should not be treated as transfer in case of takeover and share swap," he said.

According to analysts, what the government must now realise is that what it gives up as revenue by these measures will be far less than the benefits it can reap from the positive fallout this will have on sentiment.