Budget impact: Dividend tax on private trusts to hit succession planning

CHENNAI/MUMBAI: Promoters who had set up private trusts from the perspective of succession planning will find the Budget proposals unpalatable. Last year, the Budget introduced a tax levy of 10% for individuals, HUFs and firms that earned dividend income of more than Rs 10 lakh a year. This year, private trusts come within its ambit. Domestic companies, charitable trusts and similar non-profit entities continue to remain exempt from this levy.

Punit Shah, partner, Dhruva Advisors, says, "The revised provisions have been introduced to provide parity between rich shareholders who directly held shares and those that held it via private trusts."

Aarthi Sivanandh, partner, J Sagar Associates, says, "Although the new provisions may result in some discomfort for private trusts, it isn’t a seismic change to the world of family business succession planning. Trust planning structures exist for a variety of reasons including governance, calibrating control, or compliance in listed shareholding patterns. Tax is only one single thread for looping through that needle of succession planning."




Corporate giants like Wipro and Reliance Industries have private trusts holding shares. As do other companies such as the Ajay Piramal group.

Take Wipro for instance: Azim Premji, in his personal capacity, held 9.34 crore shares (or 3.78%) of the total shareholding. The company declared a dividend of Rs 6 per share and Premji earned a gross dividend of Rs 56.04 crore which would attract the 10% levy. Now, even dividends earned by Azim Premji Trust (if it is not a charitable trust) will attract such a levy.

Similarly, Mukesh Ambani held 36.15 lakh shares (or 0.11%) of the total share capital, earning a taxable dividend of Rs 3.8 crore. Petroleum Trust, a private trust (where the beneficiary is a subsidiary company), held 3.72% of the total share capital. Dividends earned by it will now attract a tax levy.