Negative impact on domestic companies feared

Our Bureau

Mumbai, Feb. 28The tax on dividend distributed (DDT) by companies has been raised by 2.5 percentage points to 15 per cent.

High dividend paying companies in the fast-moving consumer goods (FMCG) sector, pharmaceuticals and other manufacturing segment may soon have to review their dividend paying policy, say analysts and industry representatives.

Increase in DDT was unwarranted, when industry was expecting a reduction or abolishment, said

Mr Y.M. Deosthalee, Chief Financial Officer of Larsen & Toubro

.

Echoing similar sentiments,

Mr Akil Hirani, Managing Partner with international lawyers Majmudar & Co

told

Business Line

that the increase in DDT would have a negative impact on domestic companies. And companies would load this onto shareholders. The total tax outflow of a company at 51 per cent is grossly high. Companies were expecting that DDT would be reduced, if not downright scrapped, he said. High-dividend paying companies like the HULs, Reliances and Infosys and other top-tier companies would feel the impact of DDT, he added.

Pharma major Pfizer's chief in India,

Mr Kewal Handa

, also said that DDT would have a major impact on companies. "We need to move away from notional taxes like this one and FBT (fringe benefit tax) to actual taxes," he said. Dividend is paid after companies are taxed on income, so there is no need for another tax of 15 per cent, he said. The cash-flow of companies is impacted and the payout to shareholders gets reduced.

Profitable companies will now review their dividend payment policies and may reduce the rate of dividend. Companies will be left with less surplus cash to be distributed, he said.

Tata Power's Mr S. Ramakrishnan

said that the increase in dividend tax paid by corporations is especially restrictive when the country is in need of enhanced liquidity.

"The party has been spoiled" mainly by the hike in DDT, which was chief reason for the post-budget crash in the market, said a stock dealer.

Mr Keki Mistry, Managing Director of HDFC

, said that raising DDT will have its impact on the capital markets. Today, every company is looking at raising money from the capital markets. Companies look at the dividend payout ratio, to determine which you add dividend distribution tax to dividend.

Increase in dividend distribution tax and the across-the-board increase in education cess are, in the present context, quite surprising, adds

Mr Baba Kalyani, Chairman and Managing Director of Bharat Forge Ltd.

(This article was published in the Business Line print edition dated March 1, 2007)
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