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Revenue Dept for restoring I-T breaks on dividends

Hema Ramakrishnan

Sources pointed out that while the Budget proposals were being formulated, there were differences within the Finance Ministry on the issue of restoring Section 80 L benefits to shareholders and providing a threshold exemption on TDS on dividend income.

NEW DELHI, April 14

IN a last ditch attempt to avert a rollback in the Budget proposal of taxing dividends in the hands of the shareholder, the Revenue Department has mooted a comprehensive relief package for shareholders which includes restoration of income-tax breaks on dividends.

According to senior officials, the Revenue Department has made out a case for allowing shareholders deductions under Section 80 L of the Income-Tax Act, 1961 and also providing a threshold exemption on tax deducted at source (TDS) on dividend income. These benefits were available prior to 1997 when dividend was taxable in the hands of the shareholder.

Although the 2002-03 Budget has proposed a shift in the incidence of dividends from the company (at a flat rate of 10 per cent) to the shareholders (who will be taxed on the dividend income according to their individual tax slabs), it has neither restored Section 80 L nor provided for a threshold exemption on TDS.

Sources pointed out that while the Budget proposals were being formulated, there were differences within the Finance Ministry on the issue of restoring Section 80 L benefits to shareholders and providing a threshold exemption on TDS on dividend income.

"The Revenue Department proposed dovetailing the proposed shift in the tax incidence to the shareholder to the restoration of benefits under Section 80 L, Section 80 M and a threshold exemption for TDS,'' said sources.

Following objections from some of the other wings of the Finance Ministry, re-introduction of Section 80 M alone was included along with the proposal to tax dividends in the hands of shareholders. Under Section 80 M, a deduction would be available to a domestic company, which receives dividends from another company and again distributes dividend out of its profits.

The Government's proposal to tax dividends in the hands of the shareholders is to target high net worth individuals — including promoters holding large equity stakes in companies — who have earned substantial income from dividends taking advantage of the lower tax rates.

Although several companies announced their plans to declare interim dividends in an attempt to beat the Government's objective after the Budget announcement, it was scuttled by the Securities and Exchange Board of India (SEBI).

India Inc has, however, stepped up pressure to roll back the proposal. While the Finance Ministry has kicked off the process of review, the final decision — on whether to drop the proposal or retain it with some modifications — will be left to the Finance Minister, Mr Yashwant Sinha.

"The pressure on rollback seems unjustified given that the Budget proposal signals a change in the approach to dividend taxation," said sources.

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