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Dividend Distribution Tax Treatment Rejig: Why are Companies Pushing Out Big Interim Dividends to Fight Dividend Distribution Tax Abolition Blues

Professor of Financial Economics and Part-time Value Investor, Transfin.
Mar 3, 2020 12:06 PM 2 min read

As per this Financial Express report, as many as 203 companies have already declared interim dividends worth ₹27,901cr in February so far, especially in cases where the promoter stake is high, in a bid to fight the Dividend Distribution Tax Abolition (DDT) announced in the Union Budget 2020.


It is worthwhile to note here that most companies, which have given out dividends  had the average promoter dividend holding of nearly 60% at the end of December 2019.


14 of these companies that had declared no dividend in FY19 have announced a combined interim dividend worth ₹2,898cr in February alone.


For Some Background

Union Finance Minister Nirmala Sitharaman during the Union Budget 2020 speech said Dividend Distribution Tax (DDT) has been removed and will be applicable to individual investors only, next fiscal year onwards. At present, companies are required to pay DDT on the dividend paid to its shareholders at the rate of 15% plus applicable surcharge and cess, in addition to the tax payable by the company on its profits.


What Does it Mean

With the change in the dividend tax distribution treatment - from the hands of the companies to that of the individual investor, domestic companies  with higher promoter holding are keen on declaring interim dividend before March, helping them save substantial amount of tax.


“With the abolition of dividend distribution tax (DDT), any individual who earns more than ₹5cr of total income in a year will end up paying as much as 43% tax on dividend income against the earlier rate of 35% (DDT of 21% + additional 14% tax on dividend above ₹10L),” notes Tushar Sachade, Partner – tax and regulatory services at PwC India.


Here it is worthy to note that none of the MNCs, which usually boast of higher dividend payout ratio compared to those of domestic firms, have had any interim dividend announcements so far in February. 


According to Sachade, the current dividend tax structure is more beneficial for non-resident investors or MNCs like Colgate Palmolive, Glaxo Pharma and HUL as they will be able to resort to the provisions of a tax treaty, which may prescribe a lower tax rate of 10%-15%. He further added that these companies can also claim credit in their home country for taxes paid in India. Therefore, these MNCs are in no rush to declare dividends before March 31st.


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