Abolish dividend tax PDF Print E-mail
Tuesday, 16 January 2018 04:23
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Will lower effective corporate tax, markets will also like it


As part of his revenue-raising measures this year, finance minister Arun Jaitley is expected to, for instance, charge short-term capital gains taxes on shares that are held for less than two years—right now, such taxes are levied only for shares held for less than one year. The move makes sense given the relatively flat Securities Transaction Tax (STT) over the past few years despite the booming stock market—if this is done, it also brings parity between various types of investments as, right now, you have to hold immovable properties for a minimum of two years to get the benefit of long-term taxation. Another move that finance minister Jaitley may want to consider is to abolish dividend distribution tax (DDT) and, instead, levy the tax at the marginal rate of income tax for those who get this dividend. Since those who get the bulk of dividend incomes are in the top-most tax bracket anyway, removing the 20% DDT will mean the government will get taxes on this dividend at the top rate. For a sample of 4,493 listed companies, dividend distribution tax has fallen from Rs 30,238 crore in FY15 to Rs 20,611 crore in FY16 and to Rs 17,806 crore in FY17. While, in the past, it was possible for those receiving dividends to avoid paying taxes, with all dividend electronically transferred to bank accounts now, and since these bank accounts are linked to both PAN and Aadhaar, there should logically be no problem in collecting the taxes.

And while, at least initially, changing the definition of long-term for listed securities might spook the market, the proposal in DDT will actually cheer the markets. Right now, foreign investors don’t get credit in their home countries for DDT, but if this is replaced with a withholding tax, under various tax treaties, they will get a credit; and other local investors will get a credit for the withholding tax while paying their taxes on dividends at the marginal income tax rates. Since Jaitley will be hard-pressed to deliver on his 2015 promise of reducing the corporate tax rate over four years to 25% from 30%—the FY18 budget reduced this to 25% for firms with a turnover of under Rs 50 crore—abolishing DDT will help. Right now, when investors look at corporate tax rates, they typically add in the DDT as well and, if you assume that all profits are distributed as dividend, estimate the effective tax at around 46-47%. Once DDT is removed, this will lower the effective tax to around 34%. Abolishing DDT, by all accounts is a win-win and, indeed, it is not clear why this was not done earlier.


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