Dividends deluge to keep taxman at bay

Dividends deluge to keep taxman at bay

In the three days since the Union Budget, at least 70 companies have called board meetings to declare interim dividends — in a bid to get the money to the shareholders before the tax on promoters’ dividends kicks in on April 1.

The Budget, presented on Monday, had proposed a 10 per cent tax on the dividends for those promoters with annual dividend income of Rs 10 lakh or more.

These 70 firms had collectively paid dividends of about Rs 14,300 crore in FY15.

A similar trend was observed in 2007, after the Union Budget that year proposed raising the DDT to 15 per cent from 12.5 per cent.

Experts said to get a dividend of Rs 10 lakh now, one would have to own a portfolio of Rs 5 crore — assuming a dividend yield of two per cent.

Promoters are likely to prompt their companies to declare higher dividends before April 1.

“Companies where the promoter holding is on the higher side and with the cash in hand will rush to declare dividends this month," said Sunil Shah, partner, Deloitte Haskins & Sells.

Promoters of top firms are expected to be impacted by the DDT, despite special purpose vehicles (SPVs) managing their holdings.

According to a Business Standard report, some of the top promoters who would be hit by this tax — based on their dividend incomes last year — are Wipro Chairman Azim Premji and Reliance Industries Chairman and Managing Director Mukesh Ambani.

“At some stage, when the SPVs pay out dividend to the individual promoter, they would have to shell out this tax," said Riaz Thingna, director, Grant Thornton Advisory.

However, he added, the tax to be paid could be diluted if the SPVs’ dividend payout is funnelled through layers of beneficiaries.

“It’s not yet clear whether or not holding companies receiving dividends from subsidiaries would be subjected to this tax. But, on the whole, this is a retrograde double taxation measure," said Manishi Raychaudhuri, Asia Pacific strategist, BNP Paribas.

At present, companies paying dividends are charged a dividend distribution tax. The dividend is exempt in the hands of the shareholder. This effectively results in all shareholders bearing the tax in the same proportion, regardless of the income of the shareholder.

The Budget has provided that if dividend income earned by a resident individual, Hindu Undivided Family or firm in excess of Rs 10 lakh, they will be taxed at the rate of 10 per cent.

According to experts, after April 1, companies with high promoter holding may distribute lesser dividends, and instead use the cash to buy back shares.

The tax may even accelerate the exit of investors from the equity market prior to declaration of dividends and book closure dates, besides creating a disparity between resident and non-resident investors, as the latter are outside the purview of the tax.

A dividend is a tool to distribute profits to shareholders. When a firm earns profit or surplus, it can either re-invest it in the business or distribute it to shareholders. Interim dividends are dividend payments made before a company’s annual general meeting and final financial statements.