India Inc rushes to pay promoters to beat dividend tax rule

A change in the tax structure around dividend distribution has sparked a rush of disbursals before the end of the current financial year. Over ₹45,000 crore worth of dividend has been disbursed by around 300 companies listed on the NSE in less than two months, data tracked by nseinfobase.com show.

Experts said company promoters will save as much as ₹19,000 crore in the form of a lower tax payout compared to what they would have had to pay if the dividend was announced after April 1.

Finance Minister Nirmala Sitharaman had announced in her Budget speech that dividends will be taxed in the hands of the receiver from next fiscal. At present, there is a 20 per cent dividend distribution tax (DDT), which the companies deduct on surplus cash, payingthe rest to the shareholders. But, post April 1, the dividend will be considered income in the hands of the shareholders and taxed according to their respective I-T slabs.

Among the companies that have announced dividends are TCS, Adani Ports and SEZ, Apollo Hospitals, Asian Paints, Aurobindo Pharma, Bajaj Auto, Bajaj Finance, Bajaj Finserve, Bajaj Holdings, Bharti Airtel, Colgate-Palimolive, CRISIL, Dabur, DLF, Delta Corp, Emami, HCL Tech, Hero Motocorp, Hindustan Unilever, Indiabulls Housing Finance, Infosys, Marico, Nestle, MRF, Pidilite, Sun Pharma, Sun TV and Tech Mahindra.

Peak tax outgo

The savings calculation is based on the theory of peak tax outgo for company promoters, experts say. For those earning an income of more than ₹5 crore annually, the peak tax outgo comes to 43 per cent including levies and surcharge. Similarly, for those earning between ₹2 crore and ₹5 crore annually, the effective rate of tax comes to 39 per cent.

In 2019, Sitharaman had announced a surcharge of 37.5 per cent over and above the nominal 30 per cent tax rate on the income of the super-rich earning more than ₹5 crore. A 25 per cent surcharge was announced for those earning ₹2-5 crore. The change in DDT structure announced this year makes it a costly affair for company promoters to receive such a huge portion of their income after March 2020, experts observe.

Tax consultants have now advised companies to go for buybacks instead of dividends from next financial year. For shareholders, the effective rate of tax on money received from buybacks comes to just 11 per cent, covering the long-term capital gains tax. This is after the companies have deducted 20 per cent tax on the share buyback. Still, there is much to save for promoters from the peak tax outgo.