The Centre has finally ended double taxation of dividend paid by subsidiaries to parent companies. Analysts said that the move was beneficial as it would correct the anomaly related to dividend distribution tax (DDT), even though it may result in some revenue loss to the exchequer. The permanent account number (PAN) has also been made mandatory for all transactions in the financial market subject to suitable threshold exemption limits.
A parent company would be able to set off the dividend from a subsidiary against the dividend it paid out, providing dividend distribution tax had been paid and the parent was not a subsidiary of another company. The move is also likely to encourage subsidiaries to pay higher dividends to a parent company.
?Currently, a domestic company is liable to pay dividend distribution tax. As a result, the distributed dividend is sometimes taxed twice in the hands of a subsidiary company and its parent company, causing hardship,” Chidambaram explained in his Budget speech. ?It?s an anomaly that has been removed,? Krishnamurthy Vijayan, whole-time director and CEO, JP Morgan Asset Management India Pvt Ltd, said. ?It does have implications as it may lead to a loss of revenue to the government, but I am happy that the government became proactive and removed the double taxation norm,? he said.
Analysts said that it would be beneficial to the banking sector as most major banks were moving towards a parent-subsidiary structure. ?Given that most of the bigger banks are trying to move to a holding company structure, the government’s move to give them this kind of compensation is a very right move,? G Ramachandran, head of global research group at ICICI Bank Ltd, said.
Satish Menon, director, Geojit Financial Services said, “The FM has eliminated the double taxation in case of dividend distributed by a subsidiary company, by which the company would only be taxed once for that income.? On the issue of PAN being made mandatory for all financial market transactions, he said, ?PAN is already compulsory for all transactions with respect to trading insecurities in demat form as well as stock-broking and mutual funds investments and hence the statement is not clear as to what all other avenues the FM is talking about.?
So far, a subsidiary used to pay DDT and on the same dividend, the parent company again paid DDT without any mechanism of getting credit for DDT already paid. This would now end with the Budget announcement.