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Ficci flays move to tax dividends

BS Markets Bureau

The industry tirade against Finance Minister Yashwant Sinha's proposal of taxing dividend income in the hands of the investors continues. The Federation of Indian Chambers of Commerce and Industry has launched a scathing attack on the government on this issue.

"This is a regressive step which will push up the cost of equity and destroy the fragile primary market," said Ficci president Rajendra S Lodha.

The Budget has envisaged reverting to the earlier system of taxing dividend in the hands of investors, with the company being required to deduct tax at source from the dividend it pays out.

A Ficci survey on the state of the capital market, undertaken immediately after the budget, has shown that 86 per cent of the respondents believed that the imposition of dividend tax will have an adverse impact on the market sentiment.

Till now, the provisions of section 115-O required the company declaring dividend to pay a dividend distribution tax at the rate of 10 per cent, with the dividend paid being tax free in the hands of investors.

A Ficci paper pointed out that tax deduction at source is cumbersome and requires a lot of paper work for both, the taxpayer as well as the tax administration.

Under the current system of taxing dividends in the hands of the company, people were induced to invest in the capital market since dividends were free of tax and recipients of dividend were not required to file returns.

As per the Budget proposals, each shareholder will pay tax at different rates though the nature and source of income are the same.

Moreover, it is felt that while the proposed change may not result in a significant rise in revenue, it may deter inflow of foreign exchange into India, Ficci said.

The Ficci study said the dividend income is exempt from tax in many countries.

For instance, in Belgium, up to 95 per cent of dividends received are not subject to tax, while in Hong Kong, dividends are not taxable at all. Singapore gives credit to shareholders to the full extent of the tax paid by companies on profits.

In Mauritius, dividends paid by resident companies either to residents or non-residents are exempt from income tax.

In Norway, shareholders are entitled to a tax credit equal to the full amount of tax paid by the Norwegian company in respect of the dividend.

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