Financial Daily from THE HINDU group of publications
Saturday, Jul 03, 2004

News
Features
Stocks
Cross Currency
Shipping
Archives
Google

Group Sites

Opinion - Taxation


Divided dividends

G. D. Agrawal

G. D. Agrawal on the need to rationalise the dividend distribution regime

THE Finance Minister, Mr P. Chidambaram, presented in 1997 what many call a dream Budget. To his credit were a number of measures, such as tax-free dividend, a voluntary disclosure of income scheme, SEBI empowerment and sops to FIIs and infrastructure.

As Budget 2004 nears, it would be appropriate to look at the rationale of dividend distribution tax. One of the cannons of direct taxation is to reduce disparity in distribution of income. This important rule has been flouted with the levy of dividend distribution tax making, in the process, the rich richer. A large number of shareholders go scot-free, paying no income-tax on the huge amount of dividend income. Further, dividend distribution tax comes in addition to the corporate tax payable by a company.

The dividend on paid-up share capital is nothing but a cost, for the funds provided by the shareholders to companies. It is akin to interest on debentures, bonds, deposits, and funds borrowed from institutions/ banks/ other lenders and rent to property owners, and so on. But the cost of share capital has been biased towards the revenue collectors and lawmakers. The amount of dividend paid to shareholders is not allowed as cost to capital, but is subject to corporate tax.

To set right this anomaly and give a further boost to the capital market, payment of dividend up to a certain per cent over the bank rate may be allowed as business expenditure, and dividend paid over and above this threshold rate/limit should be subject to corporate tax and the dividend income also taxed in the hands of recipients thereof. In the lower interest rate regime, the threshold rate of 10-12 per cent would be ideal.

A company and its shareholders are two separate and distinct legal/physical entities. This position was established in the Solomon vs Solomon & Co. (1897 Ac 22 HC) case. This principle has also been established by the Supreme Court in the Mrs. Bacha F. Guzar vs CIT (1955 27 ITRI) case. The Madras High Court reiterated the ratio of this case in Spencer & Co. Ltd. B CWT (1969 721 TR 33). Since a company and its shareholders are distinct and separate persons, they attract tax liability in their independent capacities on their incomes separately.

The dividend is an expenditure for employing the capital in the enterprise and not otherwise. Its payment should be allowed as cost to capital. The present dividend distribution tax at 12.5 per cent plus super tax on total amount of dividend needs to be abolished. Basically, there should be no loss of revenue to the Government.

For a fair tax regime, payment of dividend as expenditure to the capital provided by the shareholders should be allowed. In a lower interest regime, at least 10 per cent of the paid-up equity capital should be allowed as business expenditure to profit-making companies. The dividend distribution tax should be on the dividend paid over and above 10 per cent of the equity capital.

The dividend income should be taxable in the hands of shareholders with exemption to individuals and Hindu undivided families having total taxable income up to Rs 1,50,000, that is, in the lowest tax bracket. And, tax deduction at source should be from the dividend payable to individuals and HUFs over Rs 5,500 or more.

Bringing back small investors will help the corporate sector derive the benefits of globalisation. There would also be no loss of revenue. Refund of TDS may be sought in genuine cases. Such an approach will attract equity investors.

(The author is a practising company secretary.)

More Stories on : Taxation

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page



Stories in this Section
Plugging the gap in institutionalised rural credit


Closing visa windows
The fig leaf of 'people's court'
Benefit of a peek
The worked up working class
Divided dividends
Not with a bang, but a whimper — American stranglehold of Iraq ends
Survival of the small enterprise is too serious to be left to politicians



The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |

Copyright 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line