Date:21/12/2004 URL: http://www.thehindubusinessline.com/2004/12/21/stories/2004122101020700.htm

Back FICCI wants Govt to revisit dividend tax

Richa Mishra

New Delhi , Dec. 20

WITH the Government kicking off the pre-Budget exercise, India Inc would like the Finance Ministry to revisit the existing dividend distribution tax regime and make it more corporate-friendly.

According to the Federation of Indian Chambers of Commerce & Industry (FICCI), it would be desirable to do away with the dividend tax altogether.

"However, if it is not possible to do away with the dividend tax in the forthcoming Budget, the rate of dividend tax should be reduced from 12.5 per cent to 5 per cent. Further, dividend tax should not be made subject to surcharge and education cess," the chamber said.

The dividend distribution tax per se is double taxation in the hands of the company - first, tax is paid on profit made and again when post-tax profit is distributed as dividend. It creates a bias in favour of undistributed profits against distributed profits, the chamber said.

"This bias encourages retention of profits in a country where capital is scarce and where the rate of capital formation needs to be accelerated and the corporate reserves, particularly of subsidiaries, would accumulate faster. But it is equally important that shareholders get commensurate yields on their equity holdings, otherwise they would prefer to choose alternative options for their investments."

Further, the Income-Tax Act levies distribution tax on dividend distributed by Indian companies at 12.5 per cent (plus surcharge), whereby the subsidiaries of US multinationals that declare tax in India also have to pay this distribution tax.

However, the existing double taxation avoidance agreement (DTAA) with US specifies that the coverage of taxes does not take into account the distribution tax introduced.

The chamber has said that the DTAA should be amended to include the distribution tax within its purview and enable the US holding companies with subsidiaries in India to offset the distribution taxes paid in India from tax payable by them in US.

Regarding double taxation, the chamber said: "One has to consider the cascading effect of this when we have multiple layers of corporate structure. For instance, the promoter group or ultimate holding company may have arranged shareholding in operating companies through chain investment companies for valid commercial reasons. In case of a chain, the distribution of dividend is multiple, but from the same source."

FICCI has suggested that the multiple dividend distribution transaction either be excluded from the levy of additional income-tax on the amount of dividend distributed by another company or such company be allowed tax credit in respect of the dividend amount, which it distributes from and out of amount of dividend on which other company has already paid additional income-tax.

Further, dividend distribution tax on corporate assesses should be relaxed for group companies. "In fact, the tax should be imposed only on the holding company," FICCI said.