In the revised draft, focus is on raising more revenue from high-net-worth residents, while leaving the slab rates unchanged for others. DTC 2013 proposes an additional levy of 10% tax on the recipient of dividend if the dividend income exceeds R1 crore. Such dividend would fall under the income category of special source and no deduction of expenditure would be allowed to be set-off against such income. This means, while non-residents are proposed to be kept out of this net so as not to further dampen the FDI environment, residents are covered.
At present, any domestic company after paying 30% corporate tax on its business profits is required to pay 15% dividend distribution tax (DDT) if it wants to distribute dividends to its shareholders. Further, once DDT is paid by the domestic company, such dividend remains tax exempt in the hands of the shareholders. However, the proposed additional tax will be paid by the resident shareholders and will be over and above the 15% paid by the distributing company. Here, if the recipient of such dividend is a company, then whether 10% rate would apply or would it be subject to MAT at the rate of 20% is also not clarified in DTC 2013.
At present, the credit of DDT is not available to the shareholder except in a case wherein the company receiving dividend from its subsidiary (in which it holds more than 50% equity shares) declares dividend to its ultimate shareholders. Here, it is to be kept in mind that DDT was introduced as a measure for easier collection of tax. So, it is clear that DDT at the rate of 15% is nothing but the taxes paid by the company for its shareholders. Thus, rather than over-taxing a select set of investors with such additional tax and discouraging them from investing, the idea should be to expand the tax base by bringing the tax evaders in the tax net and collect more revenues.
The income tax department, justifying the levy of additional tax, has stated in a note released with the draft DTC 2013 that under the Income-Tax Act as well as in the DTC Bill, 2010, the DDT is to be levied at the rate of 15%. This favours high-net-worth taxpayers who pay only a fraction of their earnings as tax on their investments in the capital market.
Exempting long-term capital gains arising from the sale of listed securities and dividend in the hands of the shareholders was clearly a boost to the Indian stock market. The idea behind such exemption is to create an investor-friendly environment in the market where investors invest the excess funds for the long-term, giving a much-required impetus to the markets. The current proposal of an additional 10% tax may lead to an aggravation of negative sentiments as the investors would view this tax as a penalty for investing excess funds in companies. This means that capital-deprived companies will resort to raising funds by way of debt, which will increase their finance costs and lead to lower profitability and, thereby, lower tax collections for the government.
Keeping in mind the capital-starved state of our country and the negative investment sentiment prevalent among the foreign investors due to the GAAR provisions and ambiguity around taxability on indirect transfer of assets, the government should avoid introducing provisions that will make the resident investors also turn their back towards making investments, while the need of the hour is to create a sound capital base.
Hiren Bhatt, director, KPMG in India, contributed to this article
The author is co-head of tax, KPMG in India. Views are personal