Transfin.

Why Shifting of Dividend Distribution Tax Liability from Companies to Shareholders Would Not Be a Good Idea

There are some unconfirmed media reports, quoting unidentified people in the knowledge, which say that the Union Budget 2020 may include a proposal to tax dividends in the hands of shareholders. This is expected to replace the current system where the companies pay the dividend distribution tax (DDT). There is also a misplaced view that such a move would be revenue neutral. We would be discussing later on in this article how such a proposal would in fact cause substantial revenue loss to the government. But first...

 

Dividends paid by domestic companies are subject to DDT (dividend tax paid by companies) at 15% on the aggregate dividends distributed. The DDT payable is required to be grossed up. The effective DDT rate works out to 20.35%, including surcharge and education cess. The estimated DDT collection for the current fiscal year could be about INR60,000cr.

 

The view that there will not be any revenue loss by shifting the dividend tax liability from companies to shareholders is rather misplaced. 

 

With an estimated DDT collection of INR60,000cr for the current year, the aggregate dividends distributed by companies would be around INR3L cr in a year. DDT ensures that government receives the full dividend tax amount at 20.35% from the companies in one clean sweep. If the dividends are to be taxed in the hands of shareholders, the government is likely to receive only about INR20,000cr as dividend tax, instead of INR60,000cr being paid as DDT by the companies. There are some obvious reasons why shifting of dividend tax liability from the companies to shareholders would lead to such a revenue loss.

 

Government of India is a major recipient of dividends from the public sector undertakings (PSUs) as promoter shareholder and from some private companies as minority shareholder. Under the present regime of DDT, companies pay DDT even on the dividends paid out to the government. If the tax liability is to be shifted to shareholders, obviously government would not pay dividend tax to itself. Government of India receives aggregate dividends of about INR1L cr crore in a year from PSUs and some major private companies like Hindustan Zinc, ITC etc in which it holds minority stakes. Hence INR20,000cr of DDT paid by companies on the dividends paid out to the government, would be a potential revenue loss.

 

At present, in addition to DDT paid by companies, dividends received in excess of INR10L in a year by individual shareholders are also taxable in the hands of such shareholders, even though this may amount to double taxation of dividends. These "super-rich" shareholders who receive dividends in excess of INR10L in a year would presumably be promoters of private companies, institutional shareholders and HNI investors. The loss of DDT paid by companies on dividends paid out to super-rich shareholders and promoters would not get offset, as such shareholders are already paying the dividend tax. The potential revenue loss under this category could be another INR20,000cr in a year.

 

There would also be some marginal shareholders whose total income may not exceed the taxable income limit. Hence, no dividend tax could be collected from such marginal shareholders.

 

Why Shifting of Dividend Distribution Tax Liability from Companies to Shareholders Would Not Be a Good Idea

 

To sum up, the proposal to shift the dividend tax liability from companies to shareholders may just amount to a give-away to the corporate sector. But the dividend tax to be collected directly from the individual shareholders would me much lower than the amount of DDT foregone.

 

DDT paid by companies, therefore, is a cash cow and should not be scrapped by the government.

FIN.

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