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Hema Ramakrishnan

NEW DELHI, July 21

THE Finance Ministry is considering an enhancement of the threshold exemption of Rs 1,000 on tax deducted at source (TDS) on dividend income received by investors from companies and mutual funds. The proposal, if carried through, will benefit small investors.

Currently, tax is deducted at source if the shareholder receives a dividend income of over Rs 1,000 from a company or a mutual fund. The Revenue Department is examining a proposal to raise the threshold exemption to at least Rs 2,500 - which was the exemption available to shareholders prior to 1997 when dividend was taxable at the hands of the shareholder rather than at the point of distribution, said official sources. A higher threshold exemption will also reduce paperwork for companies issuing TDS certificates to shareholders receiving dividend income and the income-tax department, which scrutinises refund claims.

The change is to be done through the introduction of an Income-Tax Amendment Bill in the ongoing monsoon session of Parliament.

The Finance Minister, Mr Jaswant Singh, was briefed on a host of alternatives on taxing of dividends. These include freeing dividend income fully from tax. This option has not found favour in view of the revenue implications.

Another alternative is to introduce the concept of dividend imputation, which is in vogue in countries like Australia. Dividend imputation means that a shareholder who is liable to pay tax on dividend income is allowed credit for the tax that the company has already paid (i.e., on the profits from which the dividend is paid).

The effect dividend imputation has on shareholders depends on the latter's taxable income and the amount of tax paid by the company. In some cases, a shareholder actually pays less after receiving income than would have been payable without it.

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