New formula to raise tax on dividend payout | india | Hindustan Times
Today in New Delhi, India
Jul 21, 2017-Friday
-°C
New Delhi
  • Humidity
    -
  • Wind
    -

New formula to raise tax on dividend payout

According to the Budget presented by finance minister Arun Jaitely, it is proposed that income and dividend distribution tax will be levied on gross amount instead of amount paid net of taxes and that tax experts say would lead to a slightly higher tax.

india Updated: Jul 11, 2014 00:43 IST
HT Correspondent

The government seems to have rejigged the method of computing the dividend distribution tax. According to the Budget presented by finance minister Arun Jaitely, it is proposed that income and dividend distribution tax will be levied on gross amount instead of amount paid net of taxes and that tax experts say would lead to a slightly higher tax.

“In the year 2003, the tax liability on income by way of dividends was shifted from the shareholder to the company. The shareholder was required to pay tax on the gross dividends, but now the company pays tax on the dividend amount net of taxes. Similarly, in the case of Mutual Fund, income distribution tax is paid on the income distributed net of taxes. I propose to remove this anomaly both in the case of the company and the Mutual Fund,” Jaitley said.

As per current rules, the DDT is 15% plus additional surcharge. The effective tax rate comes to around 16.995%.

The government’s proposal to rejig the method to calculate the dividend distribution tax will effectively increase the effective tax rate, said Vipul Jhaveri, Partner at Deloitte Haskins & Sells.

“The government has proposed to apply the DDT by grossing up the said amount. So, for instance if Rs 85 was the dividend amount and 15% of it was DDT, new proposals would mean DDT is levied on Rs 100 and thus the tax will go up by around 2.25%,” Jhaveri pointed out.

The higher tax being paid by companies will essentially mean investors get lower dividend.

Reacting to the proposal, Suresh Surana, founder, RSM Astute Consulting Group said: “This is very positive step for improving inflow of funds in India. However, taxability of such foreign dividend under Minimum Alternate Tax (MAT) may partially negate the benefit of concessional tax rate.”

Kuldip Kumar, executive director (tax and regulatory) at PwC India said, “under the existing law, the DDT was applied on net amount of dividends actually paid to the shareholders.”

“As per budget proposal, DDT is proposed to be applied to the amount of dividend distributed to shareholders by grossing up the said amount. Effectively this means amount of dividends actually paid to the shareholder would go down by Rs 2.47 for every Rs 100 to be distributed to shareholder before calculating DDT,” he said.