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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.

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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