Feb 13, 2013 04:40 PM IST | Source: Moneycontrol.com

Govt should scrap dividend distribution tax: SES's Gupta

Jitendra Nath Gupta is of the opinion that dividend distribution tax (DDT) hurts small investors while at the same time benefitting the rich. Scrapping DDT will bring in lots of benefits in addition to extra revenues for government. Gupta explains the taxation of Dividend and how it impacts investors.

Govt should scrap dividend distribution tax: SES's Gupta

Jitendra Nath Gupta is of the opinion that dividend distribution tax (DDT) hurts small investors while at the same time benefitting the rich. Scrapping DDT will bring in lots of benefits in addition to extra revenues for government. Gupta explains the taxation of Dividend and how it impacts investors.

Taxation of Dividend

At present dividend is taxed as under

· There is effective uniform tax of 16.23% on distribution of dividend (dividend distribution tax “DDT”). This is payable by all corporates on dividend declared and paid by them to shareholders.

· Dividend is thereafter not taxable in the hands of recipients .There is exemption to recipients from any tax and any dividend paid by any company out of dividend received by it exempted from DDT.

(Also Read: Union Budget 2013: Hike service tax exemption limit to Rs 20 lakh, says EPCH)

Background of DDT

· Prior to DDT dividend was taxable in the hands of recipients and a small amount of dividend was exempted from tax in the hands of individual tax payer. Companies were taxed on their dividend income as well.

· DDT was introduced as it was difficult to tax dividend in the hands of millions of investors, cost of administration was high, there was TDS on dividend beyond a limit and reconciliation was also a problem. Further there was double taxation of dividend in case of corporate shareholder.

Changes from time DDT was introduced till present

· Most of the shares/securities are held in electronic form

· Entire trading in stock market is screen based

· PAN is must for  opening a bank account , securities trading account, Demat account

· Authorities have entire financial data of any individual based on PAN number

Tax administration has become lot easier with technology, use of PAN and demat accounts. Today IT department can find out total amount of dividend paid to any individual across all companies in any financial year and can also track its credit in any account.

Unintended consequence of DDT:

While DDT was to make tax administration and collection easier and simple there are unintended consequences of the same.

· All investors are taxed at uniform rate of 16.23%.

· A person in highest tax bracket pays effectively 16.23% tax against 30% on income

· A person who is below taxable income pays 16.23% against zero %.

· DDT has socialised taxation. Or putting it in another manner a small investor is subsidizing a big investor as far as dividend tax is concerned.

(Also Read: Best tax saving fixed income investments under section 80C)

Data analysis:

SES has analysed data in respect of BSE- 200 companies for last three years for dividends paid by BSE 200 companies. The analysis breaks down the payment to various categories of shareholders.

Shareholders categories are as per division of shareholders in filing of shareholding pattern on BSE.

Annexure I – Details of DDT paid over three years category wise

Annexure II- Various scenario of tax on dividend

The analysis reveals that for 2011-12

· Total payout of dividend by BSE 200 companies was Rs. 83,369 cr. On which DDT amounted to 13,527 Cr. Total out go for companies was Rs. 96,896 cr. (Dividend+DDT). Of the dividend distributed category wise analysis revealed that ;

i) 60.00% of total dividend paid out amounting to Rs 50,025 cr. was distributed to Promoters(Indian and Foreign)

ii) 4.68% of total dividend paid out amounting to Rs 3903 cr. was distributed to other corporates

iii) 11.91% of total dividend paid out amounting to Rs 9,925 cr. was distributed to Institutional shareholders including mutual funds and insurance companies.

iv) 13.58% of total dividend paid out amounting to Rs 11,319 cr. was distributed to FIIs

v) 1.36% of total dividend paid out amounting to Rs 1,133 cr. was distributed to Individual shareholders holding shares at nominal value of Rs. One lac and more.

vi) 5.55% of total dividend paid out amounting to Rs 4626 c.r was distributed to Individual shareholders holding shares at nominal value up to Rs. One lac.

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· If there was no DDT and everyone paid tax on the income as per their tax bracket (assuming individual investors paid no tax and all others were in tax bracket of 30%, the tax collected would be Rs.27,061 cr. The tax revenue would be higher by Rs. 13,534 cr.

· If we take extreme position of facilitating investors to come to capital market invest in equities and participate in providing risk capital directly or through mutual fund/insurance or pension fund route and exempt such investors from tax on dividend, then in Year 2011-12 total tax collection would amount to Rs.19,524 cr. Higher by Rs.5,997 cr. over  DDT amounting to Rs. 13527 cr. Collected in FY 2011-12 from BSE 200 companies.

· If we take a position that all other investors pay tax at current DDT rate and corporates pay tax at 30% ( tax rate applicable to them)  and individuals did not pay any tax collection for 20111-12 would be Rs.23,600 cr ,Rs 10,073 cr. Above DDT collected.

· These figures relate to only BSE 200 companies. If the data for all companies is analysed the amount would certainly be much higher than what has been calculated.

 

The above analysis aims at demonstrating that benefit of DDT has gone to big people at the cost of small investors.  In past few years participation in capital market by investors has come down drastically for host of reasons. In order to generate risk capital incentives to investors are must. It is felt that DDT needs a relook.

Proposed taxation of dividend

1. Discontinue present DDT

2. Dividend to be taxable in hands of recipient at taxation rate applicable to recipient.

3. If recipient has net loss / un-absorbed loss following options can be considered

a. the dividend income can be allowed to be set off, however minimum 16.23%  tax shall be paid on the dividend received however no pass thru benefit will be available. If the recipient pays any dividend further tax credit will not be available or

b.No set off be allowed and dividend be taxed in the hands of recipient at maximum applicable tax slab with pass thru facility allowed.

4. A company receiving dividend income will be able to pass thru dividend to its shareholder without paying tax on it. This pass through will be allowed upto any layers (same as at present).

5. All MFs/Insurance companies shall pay tax at 16.23% or at 0% or any rate in between. It is recommended that MFs and insurance where small investors invest shall be exempted. Revenue loss will be much less and would get compensated from corporate tax.

6. All OBCs/FIIs shall pay tax at the rate of 16.23% or as determined by tax treaty whichever is higher.

7. All those holding shares in physical mode shall be paid dividend after deducting TDS @30%

8. All individual shareholders shall pay no tax on dividend or income up to Rs. 2.0 lac from dividend can be exempted and balance income to be taxed at 16.23 % or tax slab applicable whichever is lower. This would encourage small shareholders to participate in the capital market.

9. To keep tax flow going div in excess of Rs. 1.00 lac may be taxed at maximum rate or the rate for category of investor and TDS applied.

10. At the end of year IT deptt can send to all assesse a statement of total dividend recd by then in any FY. And enable payment/collection of dividend.

The proposed changes in tax system will result in following:

1. Encourage small shareholder participation

2. Incentivise conversion of physical shareholding to Demat holding

3. Give boost to insurance, mutual fund and pension fund activity.

4. Tax dividend according to tax bracket of assessee. It is likely that for most individual tax payer the proposal may be tax neutral and to large number of small investor it could result in benefit

5. Revenue on account of tax from dividend will go up as all others will pay tax at higher rate

6. There is no issue for tax administration as at the year end there will be data available for dividend paid PAN wise, and reconciliation cal always be made for each assessee. The only change that will be required will be to introduce tax head of income/tax from dividend.

7. If implemented the above proposal will result in increased tax collection to government.

- JN Gupta

(The writer is the founder and Managing Director, Stakeholder Empowerment Services, a proxy advisory firm)

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