The Hindu Business Line : SBI, ICICI Bank, HDFC to gain from DDT change

Mumbai, March 6 Banks such as State Bank of India, ICICI Bank and housing finance companies such as HDFC stand to gain from the budgetary proposal to removal of the double taxation of dividends paid by a subsidiary company and its parent.

These institutions have large number of subsidiaries and earn a substantial income as dividend from these subsidiaries.

Dividend Distribution Tax (DDT) is currently at 15 per cent. Currently, when company that is a subsidiary of another company, pays dividend to its parent, it is taxed. Then, when the parent company pays dividend to its shareholders, it is taxed again. So, both the associate and the parent are paying DDT.

The budgetary proposal now allows the set-off of the tax paid by the subsidiary on dividends declared to parent company.

ICICI Bank has 17 domestic and international subsidiaries.

SBI has seven associate banks, four foreign subsidiaries and four non-banking subsidiaries. HDFC has 12 associates and subsidiaries.

According to Ms Chandana Jha, banking analyst with PINC Research, this move is positive for ICICI Bank and SBI, particularly because of the holding structure.

“The budget proposal avoids double taxation. Now the parent can save the tax on the dividend it gets from the subsidiary, against the dividend it pays. How much each bank will save will depend on the history of dividend payments,” she said.

Mr Ravikant Bhat, banking analyst with IDBI Capital, said it will be a small amount of saving for SBI.

“In 2006-07, the dividend income for SBI was substantially higher at almost Rs 6oo crore, against the earlier fiscal. This is because DDT was introduced last year and the subsidiaries had declared dividend.”

However, he added, “In terms of book value the saving will not be very significant. This is because dividend payment happens after net profits are declared. So a portion of profits goes as DDT and a portion goes to reserves,” he said.

Based on last fiscal’s figures, and calculating DDT at 15 per cent, the amounts these institutions would save would probably work out to be Rs 89.55 crore for SBI, Rs 67.2 crore for ICICI Bank and Rs 17.7 crore for HDFC.