Most promoter-owners hold equity individually or in trusts, and are in the upper tax bracket. So, they will now have to pay 43 per cent tax on dividends from April 1.
Companies with high promoter holding are likely to announce high interim dividends in March before the new budget proposal, which makes dividend income taxable in the hands of the recipient, takes effect from April.
Most promoter-owners hold equity individually or in trusts, and are in the upper tax bracket. So, they will now have to pay 43 per cent tax on dividends from April 1.
At present, shareholders in the country need not pay any tax on income from dividends from domestic companies for receipts up to Rs 10 lakh, and they are taxed 10 per cent on dividend income beyond Rs 10 lakh. After the abolition of dividend distribution tax (DDT), investors will have to pay according to their respective tax slabs, which are as high as 43 per cent.
“Shareholders of companies with high promoter holding can expect a flurry of dividend announcements in March,” said Vijay Bhushan, president, Association of National Exchanges of Members of India (ANMI). “This could generate short-term buying interest in the cash-rich companies as yields have become attractive with falling stock prices.”
For instance, Mukesh Ambani and his personal firms have received nearlyRs 1,800 crore of dividend from Reliance Industries in FY19. Anil Agarwal and his holding companies have got dividend of Rs 3,500 crore last year from Vedanta. Similarly, the Munjal family received nearly Rs 600 crore of dividend from Hero MotoCorp. These are calculations based on the dividend payouts at the respective companies in FY19 and promoter holding.
However, some companies are owned by holding companies and they will have to pay the new tax only if the holding company is not a dividend paying company, said analysts.
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“Under revised section 80M (of the Income-Tax Act), for a dividend paying company it can avail deduction to the extent of dividend received or distributed, whichever is less,” said Gaurav Dua, head of capital market strategy & investments, Sharekhan.
There could be a rush of interim dividend announcements similar to what happened in March 2007 after the presentation of the 2007-08 Budget, when the then finance minister P Chidambaram proposed an increase in dividend distribution tax (DDT) to 15 per cent from 12.5 per cent.
A record 300 companies listed on the BSE and NSE announced their plans to pay interim dividends.
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“Many companies will likely pay interim dividends by March 31and look for some other options to reward the shareholders from the next fiscal,” said Ravi Sardana, senior VP – investment banking, ICICI Securities.
A similar rush to pay interim dividend was witnessed in 2002, when the then finance minister Yashwant Sinha had proposed to make dividends taxable in the hands of the shareholders.
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Budget 2020 has proposed to abolish DDT on dividends paid by the corporates and transfer the tax burden completely in the hands of the recipient.
Budget impact: How Sensex stocks may perform over next 1 year
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Shifting payment of dividend distribution tax (DDT) from companies to investors, full tax benefit to sovereign funds investing in infra projects and a thrust on rural consumption failed to enthuse markets.
ICICI Securities projects how Sensex stocks may perform over the next one year:
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Rise in discretionary income for taxpayers who migrate to the new tax regime is a positive for Maruti. However, given the lacklustre new product line-up and limited operating leverage, we hold a ‘negative’ view on the company. It trades at expensive valuations of 25x P/E on FY22E.
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Abloshing dividend distribution tax may result in promoter led high-paying dividend companies to increase share buyback amount before the end of the current fi scal year to save tax outgo for the promoters. RIL paid dividend of Rs 3,554 crore in FY19.
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