The Union Budget’s move to impose additional Dividend Distribution Tax (DDT) of 10 per cent on dividend earnings above Rs 10 lakhs is likely to throw upon the dividend floodgates before the provision kicks in from April 1.
Any dividend declared before March 31, 2016 will not be taxable at the hand of the recipient.
In the past two days, over 10 companies have announced dividend to investors post Finance Minister Arun Jaitley’s Union Budget 2016 announcement. These include Zydus Wellness, Vardhman Textiles, Suven Life Sciences, Solar Industries and Mahindra Life Developers.
The budget has proposed that dividend income in excess of Rs 10 lakh per annum in the case of an individual, HUF or a firm who is resident in India, will be taxed at 10 per cent on a gross basis.
This additional 10 per cent tax is over and above 15 per cent DDT (Dividend Distribution Tax) paid by companies. The objective behind charging DDT is to target promoters and ultra High Net Worth Individuals who receive hefty dividends.
Up to March 31, 2015, companies paid DDT at the rate of 15 per cent 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 per cent (including surcharge and cess) Centrum Broking in a research note said that promoters who will be impacted by this announcement are likely to encourage companies to declare higher dividends before March 31, 2016.
Companies with high promoter shareholding will also prefer advancing dividend payout and may pay most of it before March 31, 2016 so that they do not end up paying 10 per cent tax on their dividend income.
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.
Below are some names of companies that have made a dividend announcement in the past 2 days. Some have already set a record date, while others will have board meetings to consider an interim dividend.
Dividend On Cards
JB Chemicals & Pharmaceuticals
Mahindra Lifespace Developers
Suven Life Sciences
Source: BSE, Centrum Wealth Research