Revenue-hungry finmin mulls taxing dividends of super-rich

Left with few options to increase revenue productivity in an economy that has slowed down, the finance ministry is weighing various options that won't directly hit the common man, but would accelerate revenues from high net worth individuals (HNIs). While one option is to hike the top income tax rate for persons with taxable income above a threshold, the ministry is also internally discussing increasing the effective tax rate on dividends received by the "super-rich" to 30%, the existing maximum marginal income tax rate.

According to sources, the idea is to tax the dividend income beyond a certain threshold, say Rs 20 lakh, in the hands of the receiver also, at the same rate it is taxed at the giver's end. Currently, companies pay 15% dividend distribution tax (DDT) but the dividend is tax-free in the receiver's hands. If the proposal is cleared, only sparingly would the new impost be levied, so that it impacts only the really affluent like promoters of large companies and other significant shareholders.

Listed private companies paid dividends of close to R60,000 crore to promoter groups in 2011-12. This is one chunk that could be brought under the additional dividend tax. The government is inclined to prefer this option over the idea of raising the marginal rate of personal income tax for the super-rich, as suggested by some economists because it could be targetted more efficiently at the "super-rich."

Among private sector players, Tata Group, Reliance Industries, Vedanta Group, Wipro and Hero Group paid the highest dividends to their promoter groups in 2011-12.

Analysts expressed different views on the idea of taxing dividends twice. "This would affect promoters of profitable companies as it amounts to double-taxation. However, since it will impact only a very limited number of people, it makes sense in terms of targeting the super-rich," said Sunil Jain, partner & head of direct tax practice, J Sagar Associates.

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