The hard left turn through large dollops of fund allocation towards rural distress and infrastructure development was the right way forward for the BJP. In India, no political formation can ignore this reality anymore. And if they do so, they do it at their own peril. Rural incomes have fallen off the cliff. Two successive droughts have made life difficult for the farmer. Between 2012 and 2015, agricultural GDP has drifted down steeply -- from an average of 4 per cent in the previous five years to 1.7 per cent. More worrisome is the fact that nearly 300,000 farmers have committed suicide in the last decade. As many as 302 districts in the country were declared drought-hit last year. Nobody grudges the spends to alleviate the woes of Bharat and the creaking infra there. If rural consumption picks up, the wheels of the economy will also start chugging once again. The savings garnered from the global oil glut transposed to revitalise Bharat will stand us in good stead as the money begins to percolate down.
In parallel, there was an attack on the well heeled in the budget through an underlying credo of tax the rich and well to do since they can afford to pay more. The 12 per cent surcharge on income over Rs 1 crore for instance being raised to 15 per cent was one such move. In its quest to grab the centrist space, the BJP unveiled many measures like additional tax at the rate of 10 per cent of gross amount of dividend will be payable by the recipients of dividends in excess of Rs 10 lakh per annum, excise duty levied on ready made garments and gold jewellery, a morally corrosive compliance window for tax offenders at 45 per cent taxation, including immunity from prosecution, tax to be collected at source on purchase of luxury cars exceeding value of Rs 10 lakh and purchase of goods and services in cash exceeding Rs two lakh, securities transaction tax on options increased from 0.17 per cent to 0.05 per cent and penalty rates to be 50 per cent of tax in case of under reporting of income and 200 per cent of tax where there is mis-reporting of facts. Then there is one more cess – non creditable infrastructure cess – 1 per cent on small petrol, LPG and CNG cars, 2.5 per cent on diesel cars of certain capacity and 4 per cent on other higher engine capacity cars and SUVs.
It is the dividend distribution tax which targets the ultra rich most directly. 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."
Centrum Wealth Research points out that 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.
Actually, 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. However, once the move comes into effect from April 1, 2016, companies may avoid declaring high dividends and may opt for the more tax-effective buy-back option.
Similar flurry of dividend distributions have been noticed in the month of March in every year whenever changes have been made in the rates or modes of taxation of dividends. Investors wanting to take advantage of such dividend distribution may look at companies mentioned in the report. The companies mentioned in exhibit 1 are some names that have made a dividend announcement in the last 2 days. Some have already set a record date, while others will have board meetings to consider an interim dividend, payable before March 31, 2016 in order to escape the 10% additional tax.
The author is a senior journalist and commentator based in New Delhi.
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