Budget 2016: Dividend tax may add over Rs 8,000 crore to government coffers

Promoters of India Inc will no longer be able to enjoy tax-free dividends in their hands. On Monday, finance minister Arun Jaitley proposed to apply 10 per cent tax on dividends above Rs 10 lakh, in the hands of individuals, companies and Hindu Undivided Families (HUFs). This is over and above the dividend tax paid by companies before distribution.

The proposal if passed will help the government mop up over Rs 8,000 crore or $1.2 billion from company promoters alone. In FY15, a sample of over 1,000 companies declared total dividend of Rs 1,41,050 crore. Of this, promoters took home over Rs 78,400 crore.

Among promoters, the Tata group earned dividend of over Rs 12,130 crore in FY15 according to ET Intelligence Group’s estimates, which results in a dividend distribution tax of Rs 1,213 crore considering the government’s budget proposal. The top 10 dividend taking promoters would end up paying about Rs 2,650 crore in dividend tax.

The tax collection from dividend tax is also likely to improve in the coming years considering the possibility of an economic turnaround, which would improve corporate profits and dividends too. For the sample, promoter dividends increased two and a half times since FY10 implying a five-year compounded annual growth rate ( CAGR) of 18.5 per cent.

The promoters and high networth individuals will also take a hit due to increased surcharge to 15 per cent from 12 per cent on income above Rs 1 crore.