Revenue-hungry finmin mulls taxing dividends of super-rich

Written by Sunny Verma | New Delhi | Updated: Jan 16 2013, 06:03am hrs
Left with few options to increase revenue productivity in an economy that has slowed down, the finance ministry is weighing various options that wont directly hit the common man, but would accelerate revenues from high net worth individuals (HNIs). While one option is to hike the top income tax rate for persons with taxable income above a threshold, the ministry is also internally discussing increasing the effective tax rate on dividends received by the super-rich to 30%, the existing maximum marginal income tax rate.

According to sources, the idea is to tax the dividend income beyond a certain threshold, say Rs 20 lakh, in the hands of the receiver also, at the same rate it is taxed at the givers end. Currently, companies pay 15% dividend distribution tax (DDT) but the dividend is tax-free in the receivers hands. If the proposal is cleared, only sparingly would the new impost be levied, so that it impacts only the really affluent like promoters of large companies and other significant shareholders.

Listed private companies paid dividends of close to R60,000 crore to promoter groups in 2011-12. This is one chunk that could be brought under the additional dividend tax. The government is inclined to prefer this option over the idea of raising the marginal rate of personal income tax for the super-rich, as suggested by some economists because it could be targetted more efficiently at the super-rich.

Among private sector players, Tata Group, Reliance Industries, Vedanta Group, Wipro and Hero Group paid the highest dividends to their promoter groups in 2011-12.

Analysts expressed different views on the idea of taxing dividends twice. This would affect promoters of profitable companies as it amounts to double-taxation. However, since it will impact only a very limited number of people, it makes sense in terms of targeting the super-rich, said Sunil Jain, partner & head of direct tax practice, J Sagar Associates.

Even as the government is looking at ways to raise taxes amidst economic slowdown and faltering revenues, the proposal is bound to face opposition from promoters of companies, who would be the most affected.

I am totally against this proposal. This is against the principle of equality and natural justice. If introduced, it will tantamount to double tax. We see no logic behind this proposal since the dividend is already taxed in the hands of the dividend distributor. The stock market will suffer a lot, said RN Lakhotia, a direct tax expert.

Taxing at the hands of individuals is against the concept of dividend distribution tax. DDT was introduced to avoid hassles of collections from individuals, said PricewaterhouseCoopers executive director Rahul Garg.

While the proposal raises concerns of double taxation, taxing dividend above a high threshold would mean it is in line with the idea of progressive taxation. Of 32.4 million taxpayers in the country, some 400,000 reporting taxable income higher than R20 lakh paid over R93,000 crore as income tax in 2011-12. In other words, 1.3% of the taxpayer pool accounted for 63% of the total personal income tax collection of R1.5 lakh crore in the year. Currently, the highest income tax rate of 30% is applied on taxable income of R10 lakh-plus, while the top income tax rate is higher in countries like Australia, Sweden, the UK, Switzerland, Germany and Denmark.