Expect a flurry of dividends, says Centrum Wealth

MUMBAI: Centrum Wealth expects a flurry of dividends from corporates in the month of March. This is post the the government announcing an additional 10% tax for those earning an annual dividend income of more than Rs 10 lakh. Dividend income received by investors was already taxed through Dividend Distribution Tax.

In the Union Budget 2016-17, the Finance Minister said, “Dividend Distribution Tax (DDT) uniformly applies to all investors irrespective of their income slabs. This is perceived to distort the fairness and progressive nature of taxes. Persons with relatively higher income can bear a higher tax cost.”

Dividend income in excess of Rs 10 lakh per annum in the case of an individual, Hindu undivided family (HUF) or a firm who is resident in India, will be taxed at 10% on a gross basis. This additional 10% tax is over and above 15% DDT (Dividend Distribution Tax) paid by companies. Up to March 31, 2015, companies paid DDT at the rate of 15% of the net dividend payable to shareholders.

Though the rate of DDT remained unchanged in the subsequent year, the computation mechanism changed and increased the effective rate of dividend to 20.36% (including surcharge and cess). So, many are questioning whether this will amount to double taxation or even triple taxation of the same income? This will reduce the dividend income in the hands of the share-holder.

The step is targeted mostly at promoters who receive hefty dividends and ultra HNIs. The rationale behind the move is that those who have high dividend income are subjected to tax only at the rate of 15% (DDT paid by companies), whereas such income in their hands would have been chargeable to tax at the rate of 30%. The government has not changed the DDT rate or its application for companies.

The additional 10% tax will be applicable from April 1, 2016 which means that the dividends declared before March 31, 2016 will not be taxable. Those promoters who will be at the receiving end of this announcement are likely to encourage companies to declare higher dividends before March 31, 2016.

The companies with high promoter shareholding will also prefer preponing dividend pay-out and may pay most of it before March 31, 2016 so that they do not end up paying 10% tax on their dividend income. This could lead to a rise in dividend distribution in the next one month.