Govt plans to amend dividend distribution tax regime, seeks feedback from experts

A set of reforms to amend the current dividend distribution tax regime is on the anvil. The government has sought feedback from tax experts on the new structure of the regime which may also include some form of tweaking in the withholding tax rate, too.

“The reform is in the final stage of discussion and necessary proposals could come out in the next few weeks,” said an official associated with the development.

In India, the dividend distribution tax is applicable for all dividends declared by a company from April 1, 2013 onwards. This tax is paid by companies on the dividends paid to shareholders on a periodic basis.

The government, in its budget announcement in 2017, said that company promoters that hold shares via private trusts will be imposed a 10 percent tax on dividend income exceeding Rs 10 lakh. This was earlier applicable only for Hindu Undivided Family, individuals and partnership firms.

Currently, there is some uncertainty on the tax imposed on declared dividend. Individuals who have received more than Rs 10 lakh as dividend are required to pay 10 percent of it as tax. Sources said that there could be some measures to benefit retail investors so that their appetite to invest in the stock markets remains buoyant.

Instead of fresh equity issues, the 10 percent tax has led to a high number of buybacks in the Indian stock markets which has also made Securities and Exchange Board of India (Sebi) chairman Ajay Tyagi raise eyebrows. In a public forum last week, he said that more money was returned to investors than raised from investors.

With the reforms on the dividend distribution tax space, it is expected that the push from the tax authorities will be to ensure that the 10 percent tax is not used as a loophole to the push from new investments into the market to buyback of shares. A discussion paper on the same is expected to be out by the end of October.