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Thursday, Sep 26, 2002

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Don't tax the investors

THE LARGE COMMUNITY of small investors must fervently be hoping that the review of dividend taxation initiated by the Finance Ministry would result in a decision to exempt from tax such receipts in their hands. The Government would do well to grant this wish. The notion that the exemption enabled promoters to grant themselves fat dividend payouts that are tax exempt is not borne out by fact. An analysis of the financial performance of large public limited companies, published by the RBI in its latest monthly Bulletin, shows that dividend payouts as a percentage of disposable profits were actually marginally lower in 2000-01 than in the immediate previous year.

From a purely administrative point of view, subjecting dividend payouts to taxation in the hands of companies while exempting them in the hands of recipients, is a more convenient structure. Of course, such a system has not been without its element of controversy. Exempting dividend incomes from taxation in the hands of assessees prevents their aggregation with all other sources of incomes and a tax assessed in proportion to their actual disposable surplus. This, purists argue, militates against the principles of equity in taxation, where assessees are to be taxed in proportion to the actual quantum of earnings. But, then, taxation has also been about striking a balance between the conflicting objectives of administrative convenience and equity. And this not unique to the taxation of dividend incomes. Capital gains from securities-related transactions are taxed at a modest rate of 10 per cent. A higher flat rate with the added privilege of inflation adjustment is permitted in certain cases of capital gains. That too would be a distortion of the basic principle of aggregation of nominal values of surpluses from all sources for purposes of income taxation. In fact, the entire system of commodity taxation, with its in-built principle of setting off input taxes against those payable on output, is an example of centralising collection of tax resources instead of accumulating them it in the hands of assessees. In such a system, the duty effectively is loaded on final private consumption which, of course, is a function of the disposable incomes of individuals. One could argue that the system of taxation is inequitable in that it demands the same level of contribution as excise duty from a litre of petrol that a common man uses when he engages an auto-rickshaw for emergency transportation and the richest individual who takes a spin in his car. But the harsh reality is that the system of commodity taxation, which makes no distinction between relative differences in the paying capacity of the consumers, is an inescapable fact of life.

The argument of administrative convenience is relevant from another perspective as well. A direct tax system in its purest form would be desirable if the administrative machinery responsible for tax collection is not tainted by corruption. That they merely reflect a larger phenomenon of corruption at the political level is not an altogether different matter. As long as corruption permeates every level of society, mobilisation of resources for financing public expenditure is best ensured by the state reducing, as far as possible, its dependence on the assessment machinery.

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