Financial Daily from THE HINDU group of publications
Saturday, Mar 01, 2003

Port Info

Group Sites

Industry & Economy - Income Tax

Dividend tax removal — Promoters, high tax payers to be major beneficiaries

Sowmya Sundar

THE Government has reverted to the system of exempting dividend tax in the hands of the receiver and instead levying a distribution tax of 12.5 per cent in the hands of the company.

Who benefits?

The move will benefit all equity investors. Those in the higher tax bracket would benefit the most as they need not pay a high tax of 20 or 30 per cent as the case may be on dividends received. Instead, they will pay a notional tax of only 12.5 per cent.

Preference shareholders too benefit, as the preference yield will rise. In fact, preference shares could be attractive vis--vis other fixed income securities, say, for instance, fixed deposits as the tax-free return on preference shares could be higher than that earned on a fixed deposit. A one-year bank fixed deposit earns less than 6 per cent, whereas a preference shareholder of Timken India earns 7.8 per cent post tax.

Companies receiving high dividend income, for instance Ashok Leyland Finance, Bajaj Auto, Larsen & Toubro, ONGC and State Bank of India would be major beneficiaries. Most banks and financial institutions would benefit as they have higher exposures in equities as against any other company. For instance, State Bank of India received Rs 3055 crore as dividend income for the year 2002.

The promoter class would be a major gainer as they receive huge amounts, as dividends from their share holdings. They would definitely come under the highest tax bracket and would have otherwise paid a 30 per cent tax on dividends received. Promoters of companies such as Reliance Industries, Hero Honda, Bajaj Auto, Tata Steel and Tata Power would be major beneficiaries. For instance, promoters of Reliance Industries received Rs 230 crore as dividends alone for the year ended March 2002.

Dividends Vs Buyback

Cash-rich companies might find declaring dividends as a better method of distributing surplus cash than a share buyback. Companies such as Procter & Gamble and Hero Honda, who are flush with cash might choose to opt for this route.

Dividend yields attractive

Companies that declare high dividends would be an attractive investment for those in the high tax bracket as their dividend yield would be higher according to the new taxation rate as against the existing system. Most banking stocks such as Canara Bank and also certain financial companies such as First Leasing would become more attractive. For instance, the dividend yield post distribution tax for Revathi Equipment works out to 14 per cent and that for Salzer Electronics to 10.9 per cent. But investors should be cautious while picking up high dividend yield companies, as one should not be saddled with capital losses later.

Impact on corporate India

Corporates that pay high dividends would now pay more to the Government. Corporate India (3,533 companies were included in the database and out of them only 991 companies paid dividends for the year 2001-02) would have to pay Rs 2,200 crore as dividend taxes for the year 2003-04 if dividends are declared at the same rate as in 2002. For the year 2002-03, the corporates don't have to pay any taxes.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Time to invest in equity, debt

Riding the break
Jaswant smiles on the salaried
Impetus and impediments
Dividend, tax gains for MF investors
CST cut to hurt States by Rs 5,000 cr
Style & substance true to form
Will Mauritius lose its sheen?
A curate's egg
That Black Label may cost you less!
Women give the thumbs-up
Prices falling? Just read the fine print
Rly safety gets customs boost
Addl surcharge: No major impact
Health cover for the masses
Hope for disability sector
Jaswant nurtures biotech dreams
An oversight for plastic lens manufacturers?
`A boost for infrastructure'
`Small & simple' Ministry
Cement: An excise load
Many pluses, 1 minus
Good news for cement sector
`Hike in excise duty on cement unnecessary'
Cement industry sore over hike in excise duty
How much do we really owe?
Jaswant packs panch punch to push reforms
Engineering: Increase in service tax
Gold duty cut to beat down smuggling
Fertilisers: Bracing up
Urea price hike not to benefit fertiliser cos
Differing views on risks posed by asbestos use
A five-star plan
Want better roads? Pay 50 paise more for diesel, petrol
45 pc hike in kerosene, LPG subsidy
Big disappointment on oil front
ONGC signs pact with IOC to sell crude
Rs 3,600 cr more from petro sector likely
Budget breathes new life into pharmaceuticals sector
Booster dose for drugs
Pharma sector hails sops
Lower customs duty on equipment hailed — Easing of policy unlikely to lead to new power projects
Steel sector sees silver lining
Signals were clear on Kelkar
`Duty retention on cotton yarn welcome move'
SIMA hails abolition of `deemed' credit
Textile wears a smiling look
SSI list pruned further
Tyre cos hope for more sales mileage
Buoyant coal outlook calls for more pvt hands
Look great and feel good
Price cuts drive auto into top gear
Car makers upbeat about sales volumes
Towards a cycle of development
Toyota to cut price; Volvo may not
Smooth road ahead for car companies
Excise cut to fizzle out on soft drink prices
Gem sector finds hope
Good news for the sick
More benefits for health care
Small paper mills in excise trap
Chennai port has been neglected: SICCI
Keep that shirt on, prices are not going to fall
Knitters decry Cenvat net
Mining units unhappy
Govt hopeful of meeting disinvestment target
Hoping on big-ticket divestments
Disinvestment target fixed at Rs 13,200 cr
Small savings: Remain beneficial for common man
A dividend sop and an unkind cut
Jaswant leaves more money in salaried pocket
Dividend tax, capital gains tax to go — Capital markets get a lift
Dividend tax removal — Promoters, high tax payers to be major beneficiaries
Will purse bear burden or bulge?
Budget vs the professional CA
`A leg-up' for tourism trade

The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | The Sportstar | Frontline | Home |

Copyright 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line