Post Budget, companies likely to change dividend tax policy

An analysis of S&P BSE 500 companies suggests that promoters of Indian private-sector companies in particular could end up paying at least 20 per cent more as additional tax on the same dividend income.

Indian companies may well change the way they return capital to shareholders after alternations in dividend tax policy.

An analysis of S&P BSE 500 companies suggests that promoters of Indian private-sector companies in particular could end up paying at least 20 per cent more as additional tax on the same dividend income.

They are likely to explore alternative ways, including buybacks, to pay back shareholders, according to experts.

The Union Budget on Saturday said dividends would be taxed in the hands of shareholders.

This means that promoters who are taxed at the highest rate could end up paying as much as 42.7 per cent on the dividend they receive.

Dividend distribution tax (DDT) was around 20.56 per cent.

The company deducted the tax before distributing the amount to shareholders before the change.

The government has said the revenue foregone because of DDT removal would be Rs 25,000 crore, but most promoters in the S&P BSE 500 may end up paying higher tax on their dividends, according to the data examined by Business Standard.

The analysis eliminated government-owned companies from the list of S&P BSE 500 companies because both taxes and dividends go to the government in their case.

Multinational companies too may benefit and were eliminated.

This left 387 companies on the list. These companies paid 20.56 per cent tax on dividend as dividend distribution tax under the old regime.

A tax-efficient move would be to hold the shares in a corporate structure.

This would still entail a tax rate of 25.17 per cent.

This would increase the tax outgo by a fifth more than they paid earlier.

Promoters holding shares in non-corporate form may have to pay as much as 42.7 per cent tax, which is the marginal rate of tax, assuming they have an annual income of over Rs 5 crore.

This would be around a third more than the current dividend tax for both company and promoter combined.

While individual decisions on tax planning may affect the numbers, broadly the tax outgo for promoters seems likely to rise.

“Promoters might have to pay significantly higher taxes on dividends than before.

"The stake held through a corporate structure will be subject to a lower 25.17 per cent rate though ownership through a trust will be taxed at the higher rate.

"Interestingly the share buyback route becomes more attractive because the 20 per cent buyback tax remains untouched,” said Rajesh H Gandhi, partner, Deloitte Haskins & Sells.

Pranav Sayta, National Leader, International Tax & Transaction Services, EY India, said the move helped foreign investors claim credit for taxes paid against what they may owe in their home jurisdictions.

For the government, collection becomes more challenging as the onus for tax collection shifts from a relatively small number of companies to a significantly larger number of shareholders.

“It is not as simple to administer,” he said.

He added the tax on the dividend income of overseas investors who are eligible for treaty benefits would not exceed the applicable dividend withholding tax in accordance with the relevant treaty.